I can’t recall a Budget in recent years that was afforded the high praise received by this week’s effort by George Osborn. It’s put the government on a bit of a roll with a hike in the poll ratings and brought much relief from savers and those with pension pots yet to draw on. There’s now even talk of increasing the Inheritance Tax relief to £1m.
According to the Chancellor, Britain’s economic growth this year will reach 2.7% when it was forecast this time last year to be 1.8% – this he claims is the biggest upwards revision to growth forecasts in 30 years.
But, despite the popularity and optimism, there’s still a long way to go; austerity and cuts will continue for years as the Government is still spending far more than it takes in taxation. The long-term plan is to cut the annual deficit each year until 2018, when it will run a small surplus.
Our overall national debt as a share of GDP should peak around 2016 at 78% of GDP. By cutting the annual deficit and starting to reduce overall debt, savings on interest payments to overseas fund managers will be considerable, but these will still be in the region of £75bn per year by 2018 – equivalent to all the council tax, business rates and fuel duty tax take combined.
The key message going forward from George Osborne is: we are still in a financial bind and until real growth and productivity increases play their part, it leaves little room for any tax giveaways.
His budget is largely aimed at business and those potential Tory voters who may otherwise defect to UKIP: pensioners and savers, but he claims, “If you are a maker, a doer or a saver, this budget is for you”.
Savers and pensioners will benefit considerably from a generous revision of the ISA allowances to £15,000 per person per annum, and pension rule changes which will allow people to draw down the whole of their pension in one go, without the need to purchase an annuity, though some of this draw down (not the 25% tax free allowance) will be taxed at their marginal rates.
After years of interest rates on savings at minuscule levels, affecting savings and annuity rates, these changes will be welcomed from anyone living on a fixed income and savings, or taking their pension in future. Mr Osborne said, “The message from this Budget is this: you have earned it, you have saved it and this Government is on your side.”
Although the Liberal inspired personal allowance change – the amount you earn without paying the basic rate of tax – rises to £10,500, the 40p higher rate for those earning above £41,450 goes up by just one per cent, a below inflation rate amount which will mean thousands more middle income workers coming into the high rate tax band this year
According to Office of Budget Responsibility (OBR) forecasts, UK property prices are set to increase by 30% (revised from 27%) over the next five years. This rise will be fuelled in part by a rise in the number of savers investing in property rather than taking an annuity. Property agents Savills’ forecasts indicate that London will continue to take the lead in house value increases, which it predicts will rise by almost a quarter over the next five years.
The Help to Buy Loan Equity scheme is to be extended by another 4 years until 2020, four years later than planned and is predicted to support the building of 120,000 more new homes, as well as helping first time buyer get on the housing ladder.
According to the Council of Mortgage Lenders (CML) mortgage lending activity continues to strengthen year-on-year, with the total amount lent rising by 43% year-to-date, compared to the £10.6 billion lent in February 2013, marking this the highest total for a February since 2008. The February 43 per cent yearly rise follows January’s 33 per cent annual increase.
These figures all seem very encouraging especially if you invest in property but some worry that the wrong type of growth is being encouraged and that we could be heading for another debt fuelled Ponzi scheme based on ever increasing property prices and consumer debt, which led to the last crisis.
Without doubt the economy is recovering fast and the feel good factor should last beyond the next election, which presumably is the Government’s aim, but the necessity to shift the economy away from its almost total dependence on a house price feel good factor and consumer spending, towards production, exports, corporate and infrastructure investment is recognised but will it happen?
The OBR forecast of a 50% increase in capital spending over the next five years looks optimistic and is dependent on record levels of risk appetite; that businesses, big and small, will have the appetite for this long-term investment.
Tom Entwistle, Editor