For the Chancellor, George Osborne, the ‘freedom’ budget is probably a more apt name – without the influence of coalition partners and the first Conservative budget in almost two decades.
Freedom but within a fiscal straightjacket. Whilst revenues are exceeding expectations (particularly from income tax and corporation tax as the economy grows), the budget deficit is still forecast to be at least £65bn this year. The self-imposed tax lock (no increases to the rates of income tax, VAT or National Insurance) further limited the room for manoeuvre.
With this backdrop, the Chancellor’s focus was on Austerity Part 2 - changes to welfare and other taxes in order to achieve the target of eliminating the budget deficit and ‘make work pay’.
The key points included:
Many of these measures (or similar proposals) were well trailed in advance. The big surprise came at the end of the speech with the announcement that a new National Living Wage (NLW) will be introduced (replacing the National Minimum Wage it is assumed). The compulsory NLW will start at £7.20/hour in April 2016 for all workers over 25, rising to £9/hour by 2020. The implications of this change locally will take some time to work through.
The other big surprise was a further reduction in the headline rate of Corporation Tax – falling from 20% currently to 19% in 2017 and 18% in 2020. With Corporation Tax powers now devolved to the NI Executive, this change will feed into the debate on NI’s potential move to a much lower rate of Corporation Tax.
Also for businesses, the Annual Investment Allowance will be set at £200,000 per annum from 2016, (rather than falling back to £25,000) and employer National Insurance bills will be cut by another £1,000 from April 2016, as the Employment Allowance rises from £2,000 to £3,000. These proposals will act as a further incentive for businesses to invest and employ more staff.
Raising productivity, the key driver of higher living standards, was the second big theme of the speech. A revised road tax system will pay for a New Roads Fund, which Northern Ireland will benefit from a share of. Skills investment will be encouraged via an apprenticeship levy on all large firms, helping to meet the cost of the Government’s target of 3m new apprenticeships by 2020.
Otherwise, there was a number of announcements which will be of particular interest in NI:
A Spending Review in the autumn will reveal more details of changes to departmental spending, including knock on effects for the NI Executive.
In many ways though, today’s budget represents only one half of the overall picture on the Government’s finances. A further £20bn of savings/cuts are planned to eliminate the deficit, although the pace of reduction is now expected to be smoother than originally envisaged.
More broadly, the latest economic forecasts referenced by the Chancellor identified growth in the UK economy of 2.4% in 2015, 2.3% in 2016 and 2.4% in 2017. Although not spectacular, steady levels of growth in the rest of the UK reinforce the importance of this market to Northern Ireland businesses. Uncertainty in the Eurozone and a slowdown in other markets mean, however, that there a number of significant risks to this steady growth being achieved. For Northern Ireland, the road ahead continues to be challenging with an even greater onus on the private sector in the coming years to drive greater investment, increase competitiveness and create more and better paid jobs.