Budget 2016: experts respond
16 March 2016
16 March 2016
Chancellor George Osborne has delivered his eighth budget. Here, Economist Geraint Johnes and other panellists give The Conversation their take on what it means for the economy, business, healthcare and education.
John Van Reenen, professor of economics, London School of Economics
Four months is a long time in economics. When “Lucky George” delivered the Autumn Statement he had enough fiscal good news to abandon plans to radically reduce tax credits to the low paid.
Unfortunately, the bad news has come thick and fast since then, causing a downgrade in the growth forecasts in today’s budget. For example, the 2016 forecast has been cut from 2.4% to 2.0%. But even worse than this was the Office for National Statistics’ discovery that GDP in cash terms was £18 billion – smaller it they had previously thought. This means fewer tax revenues are forecast to come in over the next five years.
The Chancellor made three fiscal pledges to cap welfare, reduce debt as a share of GDP and deliver a budget surplus by 2019-20. The first two promises are out of the window, so to avoid missing the third, he announced additional spending cuts of £3.5 billion. These are all pencilled in for the end of the parliament and Osborne is hoping that his luck will return, so they never have to be made.
But austerity upon more austerity raises the question of whether there is an alternative to the medicine of more cuts. The answer is yes.
The pledge to have a 1% surplus by 2020 makes little economic sense. It is calculated as tax receipts minus total public spending. And this is not just current spending on things such as ministers’ salaries, but also capital spending on infrastructure projects like High Speed 3 and Crossrail 2. I strongly support these investments and the National Infrastructure Commission which has been pushing them.
But why must such infrastructure projects be financed just by sales of public land and other government assets? The fiscal target should be on balancing the books on current spending over the business cycle – just as it was when the Office of Budget Responsibility was first set up in 2010. Otherwise there will always be too much pressure to under-fund public investment.
John Maloney, associate professor of economics, University of Exeter
The economy has turned down, only slightly, but the growth forecasts are down for the next four years too, and that does make a difference. Downturns in the economy will mean tax receipts disappoint. In this situation a chancellor can do one of three things. He can cut spending or raise tax rates to put the deficit back on course. He can make the downturn itself his priority and cut taxes, or increase spending to get the economy moving again. Or he can shrug and do nothing. Roughly speaking Osborne cut at the beginning of the last parliament and shrugged at the end.
This time it looks as if it will be the other way round: 2019-20 is the year when a £20 billion deficit is now forecast to turn round into a £10 billion surplus. Until then there will be plenty of austerity for some – including the disabled – but this is far from an austerity budget. Given the Office of Budget Responsibility is now forecasting a lower national debt (though higher as a share of a smaller-then-expected national income) this isn’t a surprise.
Anya Ahmed, senior lecturer in social policy, University of Salford
The budget reflects the Conservatives’ long term policy commitment to increasing owner-occupied housing. Young people were encouraged to save to buy their own home through the introduction of Lifetime ISAs, and more land was released for developments to sell to first-time buyers.
The chancellor also pledged £120m to tackle homelessness. The priority is to address rough sleeping, which has doubled since 2010.
But homelessness extends beyond rough sleeping. And long-term solutions like affordable rented housing – historically provided by local authorities or housing associations – are vital to addressing this issue. Yet on the matter of social housing, Osborne was largely silent – aside from a pledge to delay imposing the benefit cap on supported accommodation until next year.
Andrew Street, professor of health economics, University of York
The government is implementing sugar taxes on soft drinks as recommended by Public Health England in its October 2015 report on Sugar Reduction.
Consuming too much sugar causes tooth decay and leads to weight gain, increasing the risk of heart disease, type 2 diabetes, and stroke. Taxing soft drinks appears an effective preventive measure. Such taxes have been introduced in Brazil, France, Mexico and parts of the US and evidence suggests they are effective at reducing obesity, either through reduced consumption or switches to less sugary drinks.
The sugar tax will be implemented in two years, allowing the industry time to reduce sugar content. There will be two tax bands, at 5g/100g and 8g/100g. Milk and pure fruit juices are exempt, as will be smaller producers.
The tax is expected to raise £520m a year. This money will be channelled to schools to support out-of-school sports activities. Surprisingly, there is little evidence that physical education classes have a detectable impact on weight among children, perhaps because these substitute alternative forms of physical activity. But enabling children to do physical exercise is a good thing in itself, irrespective of the effect it might have on weight.
Geraint Johnes, professor of economics, Lancaster University
The Chancellor’s announcements on transport infrastructure in the north come after the publication of a report by the National Infrastructure Commission earlier in the week. The commission suggests that the productivity impact of improved rail links within the Northern Powerhouse could – on a cautious estimate – add some £189m a year to earnings across the UK. Improved road links and metropolitan transport within each of the constituent cities should add further to this gain.
His reference to the forthcoming Crossrail 2 also follows another report from the NIC. A key consideration here is to provide transport infrastructure for areas where housing for the rapidly expanding capital will be developed. This will have substantial knock-on effects for the construction industry, and increase the capacity of London to grow.
Many of the measures announced in the budget have been heralded previously, but the renewed commitment to the Northern Powerhouse is particularly welcome. It is critical, though, that the Chancellor releases funding for the electrification programme, for HS3, and for further road improvements quickly.
He can do this because the government can borrow for investment at historically low rates of interest. He should do it because the fragile state of the global economy calls on government to respond by providing a stimulus through responsible investment. The Northern Powerhouse has captured imaginations, but now people are impatient to see the dream become reality.
Stephen Roper, professor of enterprise, University of Warwick
Against a backdrop of continuing austerity at home and political and economic uncertainty across Europe, Osborne announced significant measures to reduce costs for the UK’s smallest firms. Changes to the small business rate relief will mean around 600,000 of the UK’s smallest businesses will pay no business rates in the future and increases in higher rate bands will reduce rates for around one in six of all UK businesses with employees.
These changes make a welcome contribution to supporting micro-businesses across the UK’s high streets. Taking cost out of these micro firms is helpful. The key question for future growth is whether the savings are ploughed back into the businesses.
Other budget announcements will also be important for small firms in specific sectors. The freeze on fuel duty will be a relief to those firms operating in the logistics and transport sectors and firms in the hospitality sector will also welcome the freezing of duties on most types of alcoholic drinks.
Gavin Midgley, teaching fellow in accounting, University of Southampton
In many aspects, the budget delivered by Osborne was full of ambition and the measures proposed on business taxes were no exception. The chancellor made it clear that to fund the giveaways for small businesses and individuals, additional revenues will need to be raised from big corporations.
To achieve this, there will be further cuts to Corporation Tax (to be decreased to 19% in 2017, then as announced today, down to 17% in 2020). This will attract large companies to invest and operate in the UK.
A raft of measures that aim to reduce tax avoidance were also announced. Restricting the level of tax relief on interest payments due to borrowing is particularly welcome. At this stage it is difficult to judge how successful these measures will be, especially as the details on the level of cost to detect and enforce them is still unknown. But the publication of a Business Tax Roadmap is a definite step in the right direction as it signals a real commitment to dealing with these issues as well as offering guidance to those affected.
Alan Shipman, lecturer in economics, The Open University
A new Help-to-Save scheme was well-trailed before the budget. Targeting low-earners, the prospect of doubling your money if you can save up to £600 over two years, and repeating the feat two years later, will undoubtedly appeal.
But many will struggle to save these amounts. OBR forecasts show average house price inflation staying above 5% in the next five years, and growth rates of personal disposable income halving from 2.9% in 2015 to just 1.5% in 2019 and 2020. This may coincide with end-of-term austerity as the government seeks to turn the projected £21.4 billion public-sector deficit in 2018-19 into a £10.4 billion surplus in 2019-20.
As it swells the savings of those who can make them and does nothing for those who can’t, the scheme won’t necessarily reduce inequality. And some households may pursue the saving subsidy by neglecting to pay down costlier debt – giving a bigger bonus to credit card and doorstep loan companies.
Jonquil Lowe, lecturer in personal finance, The Open University
When is a U-turn not a U-turn? Days before the budget, the Chancellor announced that plans to replace pensions with individual savings accounts (ISAs) had been axed. But what are in effect pension ISAs – now rebranded the Lifetime ISA – have jumped out of the budget hat. Available from April 2017 they are a new optional way for the under-40s to save. In effect, younger generations will decide whether traditional pension schemes carry on long-term or wither on the vine.
A major difference from the axed proposal is that lifetime ISAs can be used for buying a first home, not just retirement – similar to the New Zealand Kiwi-Saver scheme. The new Lifetime ISA can be opened by anyone aged 18 to 40. On contributions up to £4,000 a year, the government will add a 25% bonus – the same tax relief a basic-rate taxpayer would get on pension contributions.
Eoin Flaherty, lecturer in sociology, Queen’s University Belfast
Compared to 2015, the changes set out in this year’s budget are more insidious and subtle in their execution. The most significant details, in terms of their implications for public welfare, are those related to the tax base.
Osborne has proposed a reduction in capital gains tax from 28% to 20%, a reduction of corporation tax to 17%, and a raising of the higher income tax threshold to £45,000. These are prime measures for raising inequality even further, by shifting the tax burden onto labour.
Lower corporation tax rates simply incentivise large multinationals to indulge in creative accounting. This does little to help grow the economy, and the prospect of job creation resulting from this measure is very much open to question.
Meanwhile, lower capital gains rates will benefit those top earners who derive their income principally from “rentier” sources, such as financial trading and property.
Measures such as the sugar tax, although welcome for public health, will disproportionately affect the poor, who end up paying a greater proportion of their income on indirect taxes.
The announcement of lifetime ISAs for the under 40s is also worrying. With growth revised downward, and little offered in this budget to enhance the income security of workers already threatened with insecure contracts, low wages, and in-work poverty, the offer of ISAs without the prospect of real income growth is meaningless.
Daniel Muijs, head of leadership, School Improvement and Effectiveness Research Centre, University of Southampton
The chancellor’s push to convert all schools to academies by 2020 is a continuation of a longstanding Conservative policy to give schools more autonomy.
The aim is to have totally transformed the schools landscape by the time the next election comes along, finally taking local authorities out of running schools altogether. In the secondary sector, just under two thirds are now academies – 2,075 out of 3,381. The picture in primary is quite different, as only around 15% of primary schools are currently academies. Converting all of them will be a huge task, not least for the Department for Education in managing the process.
David Eiser, research fellow in economics, Stirling University
The introduction of a tax on sugary drinks, which will raise around £0.5 billion, will be welcomed by the health lobby. It seems likely that Scottish taxpayers may contribute a disproportionately high share of this new tax, given higher consumption of sugary drinks, but the Scottish government will receive only a population share of the UK-wide revenues (through the Barnett formula).
Reductions in taxation of North Sea revenues were cautiously welcomed by the SNP, but were partly a political stunt by the chancellor, allowing him to make vitriolic statements about the pooling and sharing of risks. The OBR forecasts that the price of oil will remain around US$40 per barrel over the course of the parliament, with North Sea activity bringing very little revenue to the Treasury. As a result, the cuts cost the Treasury around £200m a year.
Changes to income tax include the much trailed increase to the personal allowance and the rise in the higher-rate threshold. Both are tax cuts and benefit higher earners more than lower earners. Of course by 2017, income tax will be devolved to the Scottish parliament. But while Holyrood could decide to reverse the increase in the higher-rate threshold, it will not have the power to reduce the increase in the personal allowance even if it wanted to.
The chancellor also announced cuts to business rates, particularly for smaller businesses, while at the same time devolving the revenues to local authorities. While this policy is applicable to England only, the next Scottish government is likely to face pressure to follow suit.
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David Eiser receives funding from the Economic and Social Research Council and the Nuffield Foundation.
John Van Reenen receives funding from the ESRC and ERC.
Jonquil Lowe is a member of the Women's Budget Group.
Stephen Roper is Director of the Enterprise Research Centre which is funded by the department of Business, Innovation and Skills, InnovateUK, the British Business Bank and ESRC.
Alan Shipman, Andrew Street, Anya Ahmed, Daniel Muijs, Eoin Flaherty, Gavin Midgley, Geraint Johnes, and John Maloney do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.