UK Budget 2016 - Ominous Revisions


Today's statement in the House of Commons marked George Osborne's eighth budget in just under six years as Chancellor. Whilst there were many eye-catching policies such as a tax on sugary drinks and reforms to ISAs, they could not distract from some major revisions to UK economic growth. The Office for Budget Responsibility cut their forecast of UK GDP growth in 2016/17 to 2%, down from 2.4% outlined last November. GDP forecasts are cut further by an average of 0.3% out to 2020, putting significant strain on the Chancellors commitments on the public finances.

The revisions to UK GDP growth do occur in the context of a more turbulent global economy, but this is not the main reason for these changes. Indeed the OBR have revised down UK GDP growth by a larger factor than global growth. More specifically the OBR are concerned with productivity growth in the near term. This is a long term issue for the UK economy which has been highlighted by the NERI and others in the recent past. It is not a problem that arose suddenly over the last four months. This has in turn led the OBR to, yet again, downgrade its forecast for income tax receipts which feeds directly into the fiscal downgrades.

The Chancellor has failed two of his three fiscal rules on welfare spending and public debt, but through some shifting of expenditures between years, he manages to scrape a surplus by 2019/20. It is worth noting that that much of the strain of achieving that surplus is pushed out to the latter years of this parliament. Indeed most of the reduction to expenditure will come from a further squeeze on disability benefits and public sector pensions in 2018 and 2019.

On the revenue side there was an announcement of a tax on sugary drinks which may, on the face of it, seem like a regressive tax increase. However it is worth remembering that by the same logic excise duties on cigarettes are also regressive. The aim of a sugar tax is to amend behaviour and it is likely to have a greater impact on supply rather than demand. It is most likely to affect producers rather than consumers of sugary drinks, as companies look to reduce the amount of sugar used in their products rather than face a tax.
The Personal Allowance is set to rise to £11,500 in 2017 and this is often trumpeted as a boon to low income households, however in reality it gives greater benefit to middle and higher income households. Raising the threshold for the higher rate of tax to £45,000 will once again only benefit higher income earners.

The Chancellor also outlined new structures for savers. The introduction of Help to Buy ISAs suffers from the same flaw that the original H2B scheme suffered from, namely that this boosts demand rather than tackling lack of supply in the Housing market. The introduction of 'lifetime ISAs' for the under 40s was billed as a scheme to help boost the number of young people saving for retirement, but it will most likely benefit those who have large amounts of cash available to put into savings, rather than those struggling to find any money left at the end of the month.

On business and enterprise the announcement that Corporation Tax is set to fall to 17% by 2020 will once call into question the policies of the Northern Ireland Executive on this matter. On the one hand this move will likely decrease the fine to the block grant that would occur if Corporation Tax in NI was reduced to 12.5%. However it is an unavoidable fact that one of the key selling points of the 12.5% rate by its proponents was the gap between the NI and the UK rate. Even the most supportive research for reductions in Corporation Tax identified diminishing marginal returns as the UK-NI gap closes. This latest announcement should lead to a more sober analysis of the cost and benefits of Corporation Tax reductions in Northern Ireland.

There were some giveaways to small business in the form of an increase in the threshold for business rates and increased reliefs. However as rates are a fully devolved matter for Northern Ireland and Scotland, it remains to be seen what impact this will have. Previous research has highlighted how changes in rates funded expenditures in England can affect the black grant for both jurisdictions.

The announcement of an Air Ambulance for Northern Ireland was welcome but the purported £220m of Barnett consequentials over the next four years remains to be examined. For Northern Ireland the key public spending metrics remain largely unchanged since the Autumn Statement, but the squeeze on disability benefits could have a significant impact in two to three years' time.

Overall, the key message from today's budget is that the outlook for the UK economy is not a rosy as it was four months ago. This is not due to international turbulence but rather key structural weaknesses that have all but been ignored for last six years. Without any serious attempt to tackle these issues through increased investment it is likely that the forecast delivered at the next budgetary statement will be less rosy still.

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Paul Mac Flynn

Paul Mac Flynn is co-director of the Nevin Economic Research Institute and is based in the Belfast office. In addition to managing the Belfast office he has co-responsibility for the NERI's research programme and for its strategic direction.  

He leads on the NERI’s analysis of the Northern Ireland economy along with all research into the impact of the United Kingdom‘s departure from the European Union. Other research areas include regional productivity, the all-island economy and the future of work.

He is a graduate of University College Dublin with a BA in Economics and Politics and the University of Bristol with an MSc in Economics and Public Policy, specialising in the economic impacts of political devolution in the UK.

Contact: [email protected] or 00 44 28 9024 6214.