With the news this morning that the employment rate had reached a record high at 73.3% and with lower inflation leading to an unexpected fall in debt interest payments, the backdrop to the Budget speech today could hardly have been better. The Chancellor needed to restate his commitment to the deficit reduction programme as well as outline further measures to boost living standards. Despite a few distractions, he largely achieved both tasks.
The OBR’s latest forecasts for growth and unemployment all show positive revisions. Importantly, total debt as a percentage of GDP is now on the verge of falling with borrowing falling every year in the next Parliament. A reduction in the expected surplus in 2019/20 from £23 billion to £7 billion means that public spending will be 36% of GDP which is still higher than when Gordon Brown was Chancellor in 2000.
There were a number of welcome measures including further rises in the Personal Allowance to £11,000; although faster rises would have been desirable. In addition, there has been substantial reform to the North Sea fiscal regime with the Petroleum Revenue Tax being cut from 50% to 35% and the Supplementary Charge being cut from 30% to 20%. These tax cuts are essential for an industry in great difficulty. Fuel duty cuts, the abolition of class 2 NI contributions for the self-employed and the abolition of the annual tax return system are all also good news.
The most impressive policies announced by the Chancellor will be for savers – who of course have a higher propensity to vote. However, extending pension freedoms to 5 million pensioners with annuities is a bold move. In addition, significantly increasing the flexibility of ISAs along with new personal savings allowances and other announced measures will make saving easier and cheaper. As well as winning votes, the Chancellor’s proposals in this area should help to create a more powerful culture of saving and personal responsibility.
There are some issues of concern such as the significant increase in public spending in 2019/20 implied in the OBR’s new forecasts. Also, the UK’s current account deficit remains precarious and given the OBR’s downgrades of global and Eurozone growth, more measures to boost exports for example with bigger cuts to Air Passenger Duty would have been desirable. In addition, day to day spending in the Foreign and Commonwealth Office is due to be cut by 35% next year which means that international aid spending will be almost 8 times higher.
Nevertheless, by pointing out that deficit reduction in this Parliament has come alongside improvements in public service quality, falls in crime and falling child poverty, the Chancellor restated the case for balancing the budget. Whilst there is more that he could have done on productivity and exports, most of the measures he announced should be welcomed.