THE ECONOMY/PUBLIC FINANCES
The Office for Budget Responsibility (OBR) has revised its growth forecast for the economy, blaming higher-than-expected inflation as a result of recent global commodity price shocks and the weather-affected final quarter of 2010.
GDP growth has been revised down to 1.7 per cent in 2011. Growth is expected to peak at 2.9 per cent in 2013 and to remain at 2.9 per cent in 2014 and then to fall to 2.8 per cent in 2015.
The OBR says the projection for trend growth is unchanged from their November 2010 figure, at 2.35 per cent to the end of 2013, slowing to 2.10 per cent from 2014. It adds that despite this being billed a pro-growth Budget, “Policy measures announced in the Budget could increase the economy’s productive potential, in time, but we do not believe there is strong enough evidence to raise our trend growth assumption now”. The output gap is estimated to have been -3 per cent in the third quarter of 2010.
Higher-than-expected CPI inflation of between 4 and 5 per cent is expected in 2011. It is expected to fall back to around its 2 per cent target level in the medium term. The Bank of England’s inflation target remains at 2 per cent.
Public sector employment fell by 132,000 in 2010, but private sector employment rose by 428,000.
Public sector net borrowing will be £145.9bn this year, £122bn in 2011-12, £101bn in 2012-13, £70bn in 2013-14, £46bn in 2014-15 and £29bn by 2015-16.
Cyclically-adjusted public sector net borrowing will be reduced by 8.4 percentage points, from 8.9 per cent of GDP in 2009-10 to 0.5 per cent of GDP in 2015-16.
As a share of GDP, borrowing will be 10.1 per cent in 2010-11. It will fall to 7.5 per cent in 2011-12, 5.5 per cent in 2012-13, 3.5 per cent in 2013-14, 2.1 per cent in 2014-15 and 1.1 per cent in 2015-16.
The cyclically-adjusted deficit on the current budget will be 4.6 per cent this year, 3.2 per cent in 2011-12, 2.0 per cent in 2012-13 and 0.6 per cent in 2013-14. It will then return to a surplus of 0.4 per cent in 2014-15 and 0.8 per cent in 2015-16.
Public sector net debt as a share of GDP is to be 60.3 per cent in 2010-11, rising to 66.1 per cent in 2011-12, 69.7 per cent in 2012-13 and peaking at 70.9 per cent in 2013-14. It will then start falling to 70.5 per cent in 2014-15 and 69.1 per cent in 2015-16.
The OBR’s judgement is that the policies set out in the Budget are consistent with a greater than 50 per cent chance of achieving both the government’s fiscal mandate and its target for debt in 2015-16, and that both targets will be achieved a year early, in 2014-15.
Public sector current expenditure will be £632.8bn this year, rising to reach £713.4bn by 2015-16. Capital annually managed expenditure will be £11.5bn in 2010-11, falling to £7.7bn by 2015-16.
Total Managed Expenditure (TME) will rise from £694.4bn to £763.8bn over the forecast period in cash terms. It will fall by 3.7% in real terms.
Spending is projected to fall from 47.5 per cent of GDP in 2009-10 to around 40 per cent by 2015-16 and tax receipts are projected to rise from 36.5 to 38.5 per cent.
Public sector net investment is forecast to fall from £41.1bn this year to £24.5bn by 2015-16 compared with £49.5bn in 2009-10.
The government has welcomed the Hutton Review of public sector pay as a basis for setting senior pay in the public sector, and departments will bring forward implementation plans by July 2011.
Planned gilt sales by the Debt Management Office (DMO) in 2011-12 are £169bn.
To “offset the benefits to banks” from a cut in corporation tax, the rate of the bank levy will increase again to 0.078 per cent from 1 January 2012.
The government will consult on a proposal to extend pay disclosure arrangements to all large banks from 2012.
The supplementary charge on profits from UK oil and gas production increased from 20 per cent to 32 per cent at midnight, in a windfall tax on the increased profits due to higher oil prices. With restriction on decommissioning relief, it will raise some £2,000m of tax annually.
An additional 1 per cent cut in corporation tax was announced. From April 2011, the main rate of corporation tax will now be reduced from 28 per cent to 26 per cent as well as by one per cent each following year until it reaches 23 per cent in 2014.
In May 2011, further consultation on the introduction of a patent box will be published, This will be followed by draft legislation in autumn 2011. The patent box will give a reduced corporation tax rate of 10 per cent on profits from patents.
An opt-in exemption from corporation tax on the profits of foreign branches of UK companies will be added to the Finance Bill 2011 when it is published on 31 March.
In the Finance Bill 2012, new Controlled Foreign Company (CFC) rules will be introduced. A consultation document will be published in May and draft legislation in autumn 2011. The rules will include a finance company partial exemption, broadly resulting in an effective UK tax rate of one quarter of the main rate on profits derived from overseas group financing arrangements. There will be interim changes to CFC rules in the Finance Bill 2011.
A consultation this year on merging National Insurance Contributions and income tax was announced.
A moratorium will exempt micro-businesses and start-ups from new domestic regulation from 1 April 2011 for three years.
Further deregulation was promised: the implementation of the Young health and safety review, the dropping of some existing regulatory proposals and a public review to reduce the stock of burdensome regulation.
The location of ten urban enterprise zones sites were announced across England, and there will be a further enterprise zone in London. The Mayor of London has chosen an area around the Royal Docks in East London. There will be a competition for the sites of ten further zones. Businesses that move into an enterprise zone in the course of this parliament will be eligible for a 100 per cent business rate discount worth up to £275,000 over five years.
The Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) will be reformed, if EU state aid approval is granted. The rate of EIS income tax relief will then rise from 20 per cent to 30 per cent from April 2011. From April 2012, the annual EIS investment limit for individuals would double to £1m and for VCT and EIS the qualifying company limits would increase to 250 employees and to £15m assets and the annual investment limit for qualifying companies would go to £10m. The schemes will also be refocused.
From 6 April, the lifetime limit on capital gains that qualify for Entrepreneurs’ Relief (CGT at 10 per cent) will be doubled to £10m.
If state aid approval is granted, the small and medium-sized enterprise (SME) research and development tax credit will increase to 200 per cent from April 2011 and 225 per cent from April 2012.
The small business rate relief holiday will run for another year from 1 October.
The 50 per cent higher rate of tax was affirmed as temporary, but no date was set for its phasing out. All income tax rates for 2011-12 will remain at their 2010-11 levels. National insurance rates will increase by one per cent.
In addition to increasing by £1,000 this year, the personal allowance for those under 65 will increase by £630 to £8,105 in 2012-13, and the basic rate limit will then be reduced by £630, leaving the higher rate threshold unchanged. By the end of the parliament, the threshold for income tax will increase to £10,000.
Draft regulations for tax-free Junior ISAs will be published in the week of 28 March alongside the Finance Bill 2011.
The default indexation assumption for all direct taxes including ISAs will be the CPI inflation measure from April 2012.
The government plans to reform the rules on non-domiciled individuals from April 2012. Those who have been UK resident for twelve years or more will face an increase in their annual charge from £30,000 to £50,000. There will be no other substantive changes in this parliament.
Measures on tax avoidance have been introduced to raise around £4bn over this parliament, including new measures on the stamp duty land tax rules.
The government will introduce legislation to create an exemption from income tax for subsistence allowances paid to experts seconded to EU bodies located in the UK. These bodies are the European Banking Authority, the European Medicines Agency and the European Police College.
On top of the above-inflation increases already planned on tobacco and alcohol duties, hand-rolling tobacco duty is increased by 10 per cent.
Also, from 1 October 2011 an extra duty on high-strength beers and a reduced duty on low-alcohol beers will be introduced to attempt to nudge the nation’s drinkers. From 28 March, the tax on a pint will go up by 4p, on a bottle of wine by 15p and there will be 54p more tax to pay on a bottle of spirits.
The government has accepted the Hutton review of public sector pension provision. Following consultation, proposals will be set out in the autumn.
The government has decided the appropriate discount rate for calculating unfunded public service pension contribution rates should be based on the long term expectation of GDP growth. A discount rate of 3 per cent above CPI will now be used, to be reviewed in five years.
The state pension system will be reformed for future pensioners to provide simple, contributory flat-rate support above the level of the means-tested Guarantee Credit. This will, however, take years to implement. Contributions to the current system will be honoured.
The gift aid benefit limit will rise from £500 to £2,500 from April 2011, subject to the existing 5 per cent limit. Guidance will be published in the Finance Bill 2011.
From 6 April 2012, estates leaving 10 per cent or more to charity will face a reduced rate of inheritance tax at 36 per cent. From April 2013, charities will be able to claim gift aid on up to £5,000 of small donations without the need for gift aid declarations.
40,000 new apprenticeships will be created, targeted specifically at young NEETs (those not in education, employment or training). Funding will also be granted to stimulate small businesses to offer 10,000 higher level apprenticeship places.
An additional 80,000 work experience placements will be funded for young people over the next two years.
The planning application system will be simplified, removing national targets on previously-developed land but keeping greenbelt regulation intact.
The initial capitalisation of the Green Investment Bank (GIB) will be £3bn. It will begin operation in 2012-13.
From 1 April 2013, a price floor for carbon will be set in the power sector, starting at around £16 per tonne and targeting £30 by 2020. This will increase the average annual bill by £17 by 2015.
The government and builders will fund an equity investment to help some 10,000 purchases of new-build property.
For bulk purchases of residential property, stamp duty will be able to be calculated by the mean value of the properties rather than the aggregate value.
The government will provide £100m of new capital funding in 2011-12 for science and innovation campuses.
Fuel duty was cut from 6pm yesterday. A fair fuel stabiliser was announced: when oil prices are high, fuel duty will follow inflation. The 2011-12 inflation-only increase in fuel duty will be deferred to 1 January 2012 and the 2012-13 increase to 1 August 2012.
Air Passenger Duty has been frozen for 2011-12. The government will consult on how to reform the duty, including plans to extend the tax to flights on business jets.