Today the Chancellor needed to carry out pro-growth supply side reforms as well as ease the burden on lower and middle income households whilst keeping to the programme of deficit reduction. To a surprisingly large extent, because of the radical savings and pension reform, more income tax cuts and boost to exports, this Budget broadly achieves these aims. Estimates for cyclically adjusted net borrowing are higher and more radical reforms would have been desirable but many of the measures announced in this Budget are welcome.
The economic outlook has greatly improved since last year and this is perhaps best reflected by the fact that the economy grew three times faster in 2013 than the OBR predicted at the last Budget. The OBR updates its growth forecasts in 2014 from 2.4% in the Autumn Statement to 2.7% in this Budget and from 2.2% to 2.3% for 2015. It also forecasts improvements to public sector net borrowing with an expected £23.5 billion less borrowing from 2013/14 to 2018/19 compared to the Autumn Statement. However, the OBR has also quite substantially reduced its estimate of the size of the output gap (ie the difference between actual GDP and potential GDP). Last year it estimated it would be 3.7% of GDP in 2013/14 and 3.6%, 3.3% and 2.7% in the years after but now it estimates the gap to be 2% and then 1.3%, 1% and 0.6%. This means that cyclically adjusted net borrowing (ie the part of the deficit which can’t be eliminated through growth) is still higher than is comfortable and is forecast to be higher in the next two years than was expected at the Autumn Statement. Further public spending cuts will therefore be required and so the Chancellor should also look to increase the scope of the welfare cap and consider whether it really does need to rise in line with inflation.
The pension reforms announced in the Budget are radical. The 10% savings tax rate has been abolished, cash and stock ISAs have been merged with a big new limit of £15,000 and the rules for defined contribution pensions are to be overhauled along with other measures. Abolishing compulsory annuities is also most welcome. Cutting the withdrawal tax rate on pensions from 55% to the marginal income tax rate is expected to raise £320m in 2015/16, then £600m, £910m and £1,220m in the years after. As the Chancellor said, cutting tax rates leads to higher tax revenue: Thatcherite economics in action!
Other welcome initiatives were:
There was of course, as always, far too much tinkering: the £20m tax credit for theatre productions, the £20m Cathedrals grant repair scheme, the £50m extension of the cultural gifts scheme and £200m made available to fix potholes are all micro-initiatives which could have been resisted at a time when the deficit is still £108 billion this year. The 4% pensioner bond could make it difficult for businesses to compete for capital and 1p off the pint of beer duty means you would have to drink 450 pints of beer before you get one pint free.
What was missing? There could have been a greater emphasis on tax simplification and earlier introduction of the permanent tax changes such as the 20% corporation tax rate and the abolishment of employer National Insurance contributions for under 21s. Equally, the bold cuts in income tax rates of the Lawson budgets, or at least more substantial increases in thresholds, would have been welcome.
The announcement that the Carbon Price Floor trajectory 'top up' has been frozen from 2016 at £18.08t/CO2 is a long overdue admission that this policy is ludicrous: indeed, the frozen rate remains far too high. In the EU, the carbon price is around €6 today and is not expected to rise above €10 before 2016/17. The Government must now review the policy in full and look to reduce the gap between EU carbon prices and those being levied by the Government. This will reduce electricity bills, boost economic competitiveness and improve security of energy supply.
Nevertheless, in total, some of the policies announced in this Budget are potentially transformative. More such policies are desirable.