While a number of significant steps were taken by George Osborne in his Budget last week, it wasn’t the kind of Budget you would hope for towards the beginning of a Parliament. Often, a chancellor will take the opportunity of a recent election victory to make radical, in-depth reforms, perhaps simplifying the tax system. That didn’t happen last week and one of the reasons is the impending referendum on Britain’s membership of the EU.
The Budget did manage to keep the public finances on track to meet the chancellor’s fiscal mandate in 2019-20, but principally via artificial measures. The swing in the public finances between 2018-19 and 2019-20 is a huge £32bn, and much of it comes from a reprofiling of corporate tax payments and as-yet-unidentified efficiency savings of £3.5bn. But in the absence of a sharp downturn in the economy, it’s likely that Osborne will be able to run a budget surplus by the end of the Parliament.
One potential concern is productivity – this is one of the key issues with respect to economic growth, the public finances and prosperity generally. It’s not clear why productivity growth has been so weak over the recovery since the financial crisis. It’s also not clear whether we’ll see an improvement from this point on, or whether we’ll see it languishing. It’s one of the critical forecast judgements that could make a big difference.
But several measures in the Budget should make life easier for businesses, particularly smaller ones, not least the reform to business rates. By raising the relief threshold to £15,000, Osborne said it would take 600,000 small businesses out of paying business rates entirely. This is significant and is very, very welcome, given that SMEs account for some 50 per cent of private sector value added in the economy and business rates are often a large outlay.
The planned cut to the headline rate of corporation tax to 17 per cent will also be welcomed. Given that there will also be so many changes to the structure of reliefs, however, it is very difficult to know exactly who the winners will be – the details will emerge in the Finance Bill. Corporation tax is also generally a larger company issue, rather than one for SMEs.
In terms of consumer spending, the Budget should have a positive impact for businesses. Over the next few years, the income tax personal allowance will rise above the rate of inflation, as will the basic rate limit (when people start paying 40p income tax). Alongside a freeze in fuel duty, although it’s not a huge giveaway to the consumer, there is a degree of help to the average household. The new soft drinks levy, while significant to the industry, is only projected to raise in the region of £500m for the Exchequer, which is not a huge issue in terms of consumer spending generally.
This was not a memorable, ground-breaking Budget – clearly it was not a politically appropriate point to do this. But we should live in hope that a chancellor will one day grasp the nettle and fundamentally simplify the tax code and remove the number of distortions that have built up. Such steps would be a hugely positive development for both small businesses and individuals.
This article is provided for information purposes only and should not be construed as advice of any nature. The views and opinions expressed are subject to change without notice.