UK Budget 2016 review

Market Update

Wednesday’s budget statement was somewhat of a bitter-sweet affair. Chancellor George Osborne started his speech by announcing downward revisions to the UK’s economic growth forecasts. The Office for Budgetary Responsibility now forecast the economy to grow by 2.0% in 2016, significantly less than the 2.4% projected in November. Growth expectations were also revised down for 2017 (from 2.5% to 2.2%) and beyond, with the Chancellor highlighting the fact that the UK is not immune from the frailties of the global economy. However, he also stressed the relative strength of the UK economy compared to those of other developed nations.

The downgraded growth forecasts imply a potential fall in tax receipts, adversely affecting the Chancellor’s plans to reduce the budget deficit. Borrowing forecasts have shifted higher by around £5.6bn for 2016/17, to £55.5bn. That said, the Office for Budgetary Responsibility predicts a surplus of £10.4bn by 2020, aided by planned further government spending cuts of around £3.5bn.

Policy changes offsetting the gloomier economic assessment focussed heavily on savers. The key adjustments were an increase in the ISA allowance (up to £20,000 from next year) and a headline cut in capital gains tax from 28% to 20% (and from 18% to 10% for basic rate taxpayers). These were well received and should encourage further saving and investment. In addition, planned cuts to personal tax rates are expected to benefit many, with some half a million people expected to be removed from the higher tax band and the increased personal allowance effectively providing 31 million people with a tax cut. The introduction of a new “lifetime ISA”, through which the government is encouraging under-40’s to save by paying them £1 for every £4 they save (up to an annual threshold of £4000), also grabbed many headlines. Ultimately, these measures reflect the government’s desire to encourage the next generation to save more and plan for retirement earlier.

Other tax breaks aimed at the business community are also encouraging, particularly for smaller companies. The Chancellor outlined plans to continue reducing corporation tax to 17% by 2020, while the introduction of new tax thresholds for small business will provide them substantially greater tax relief. The government now estimates that some 630,000 business will no longer pay any corporation tax.

That said, there were tax increases that will affect bigger businesses operating on the global stage. These included a clampdown on tax avoidance by multinationals through tighter rules on deductibility of interest and the ability to carry losses forward. However, probably the biggest headline grab was the implementation of a “sugar tax” on soft drinks manufacturers, aimed at offsetting some of the cost of burgeoning levels of childhood obesity to the health service by broadening out funding for primary school sport. However, in isolation this initiative will result in a relatively low value of tax receipts.

On the whole, this was a good budget for savers and investors. The Chancellor managed to offset the bitterness of the deterioration in the economic outlook by implementing a few sweetening measures that should encourage small businesses and savers.

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