Budget 2016 Preview

Budget 2016 Preview

Kieran O'Connell

Pagefield’s newest recruit, Associate Partner Kieran O’Connell previews the Chancellor’s Budget ahead of what may prove to be the most pivotal moment of George Osborne’s political life.


 

Chancellor George Osborne’s reputation is not what it was at this point last year. He is losing ground in the race to succeed David Cameron to Boris Johnson. Newspapers are full of quotes ‘party sources’ claiming his authority to be diminishing.

Tomorrow’s Budget Statement offers a chance for him to regain some of this lost ground but no one is holding their breath. The Chancellor set out to manage expectations about the economy at the start of the year and his Budget is likely to reflect this lack of optimism.

Speaking in Cardiff in January he told business leaders that 2015 “was the worst year for growth since the crash” and that 2016 opened “with a dangerous cocktail of threats” around the world. Writing in The Sun last week he reminded its readers that the world continues to face significant threats.

When working in the steel sector I frequently used the phrase “global headwinds” to talk about the issues beyond the reach of British policymakers that were a danger to the economy – economic slowdown in the BRICs, collapsing oil prices, and unfavourable exchange rates.

These are difficult economic indicators to predict and they often inflict significant damage before their impact is fully realised, let alone before government is capable of acting against them. This means they offer a convenient excuse for disappointing economic performance. Expect to hear more about them tomorrow.

At last year’s budget Osborne declared that “the sun is shining and we are fixing the roof”. We won’t hear similar language tomorrow. Reports suggest that the economy is growing at a slower rate than previously predicted by the OBR and we already know the scale of the cuts he is seeking to achieve – the equivalent of 50p in every £100 of government spending over 4 years in order to save £4bn.

It is clear that this will not be a giveaway budget. However, the Chancellor will need to ensure he achieves at least two things with the resources available to him: avoid aggravating the electorate with tax rises; ensure any spending cuts can’t be painted as the EU’s fault.

This sounds obvious enough but will be difficult in practice. Shielding voters from further austerity will increase the burden on business. This could nudge some business leaders (and MPs) to join the Brexit campaign if they feel EU membership aggravates his global headwinds. And targeting middle income voters carries similar implications for the electorate ahead of the EU membership referendum.

The usual drip of stories to the press about possible budget contents ahead of the statement indicate that he is left with few options:

  • Any further austerity measures will have to be carefully targeted. A planned major revenue raising announcement of pension tax relief reform has been dropped and it is increasingly likely to be replaced by increases to ‘sin taxes’ on cigarettes and alcohol, as well as an increase to fuel duty.
  • He is expected to soften the blow by announcing a new Help to Save ISA, raising the higher tax rate threshold, increasing the personal tax allowance and announcing further housebuilding targets.
  • In order to minimise the impact on business he may look to tried and tested income sources. This means more corporate tax avoidance measures and government asset sales.
  • Giveaways will be slim. It is unclear how his devolution of business rates powers to local councils will impact the private sector and other pre-briefed changes to the business rates system (changes to charges for plant & machinery for manufacturers) are based on the premise that manufacturers are in a position to invest, despite those global headwinds.
  • Further adjusting of business taxes are to be expected with the long awaited Business Tax Roadmap due to be published tomorrow. It appears that the ‘sharing economy’ may be one of the few winners in this, with new tax reliefs for small scale property letting expected.

There may well be some of the traditional Budget Statement hats and rabbits. If so, they are being kept secret for now.

There may be some politically tactical announcements, new infrastructure projects for the northern powerhouse (with funding beyond what has previously been announced) for example. But as long as he does little to increase support for the Out campaign (currently sitting 3 points behind Remain according to YouGov), Osborne will feel as though he has done his job.

Other things to look out for:

  • John McDonnell trying a new approach following the Autumn Statement’s Little Red Book incident
  • Speeches given by Labour moderates with references to the future of the Labour party
  • Absolutely anything Boris Johnson says.