The 2015 general election was a speed camera for austerity, or so we thought. Given the content of the Budget back in March, the Chancellor had been expected to put his foot down on the austerity accelerator. Instead, however, he is set to keep the austerity drive in cruise control, with the pace to remain steady. The huge public expenditure cuts forecast in March for the next two years are now not going to be as steep as projected. Furthermore, the Chancellor has pushed back his objective of achieving a Budget surplus by one year to 2019/20. And, in fact, there is now £83billion more in departmental spending than was forecast in March. For perspective, this would be enough to fund Northern Ireland’s entire public spending for almost four years. It should be noted though that this doesn’t mean there is more public spending being made available; it is simply that the cuts will not be as severe as forecast. This is funded by welfare cuts, net tax increases and higher levels of borrowing.
Uk Budget 2015
There are some similarities between today’s Budget and the emergency Budget of 2010. Back then, multi-year benefit and public sector pay caps / freezes, alongside significant welfare spending cuts featured prominently, and the same was true today. Osborne billed it a Budget for working people. In many respects this was the case, but perhaps not for those working in the public sector. Public sector workers will see pay rises capped at 1% for the next four years beginning in 2016, and they are therefore likely to face real-terms pay cuts in some of these years (i.e. increases below the rate of inflation). They are also likely to see changes in their terms and conditions in the autumn.
From 2016, most working-age benefits will be frozen for four years, and from April 2017, child tax credit will be limited to two children. The household benefit cap will be reduced from £26,000 to £20,000 per household for regions outside London and the South East of England. Overall, all the welfare spending announcements unveiled today will impact on Northern Ireland disproportionally more than elsewhere due to its reliance on welfare spending. In turn, this will have adverse effects on consumer spending, impacting, for instance on the retail sector. As a result, the Northern Ireland economy is expected to see sluggish economic growth in 2016.
New National Living wage
One of the surprise announcements by the Chancellor was the introduction of a new national living wage (NLW) of £7.20 per hour for over 25s from next April. This is due to rise to over £9 per hour by 2020. This will be welcomed by employees in lower paid jobs, however it will represent a higher cost to employers in low wage sectors such as food, retail and hospitality. This measure will make under-25s more cost-competitive from an employer’s perspective which could help alleviate Northern Ireland’s high youth unemployment rate. Those on low pay will also welcome the increase in the tax free personal allowance to £11,000 in 2016, with the prospect of this rising to £12,500 by 2020.
When it comes to businesses, another surprise was the planned corporation tax cut to 19% in 2017 and to 18% by 2020. This will make the cost of a 12.5% corporation tax rate more affordable for Northern Ireland but it will dilute the benefit by reducing the rate’s relative competitiveness. Businesses will welcome that the annual investment allowance has been raised and will be set permanently at £200,000 from January 2016. Meanwhile businesses will also have their employer national insurance bill cut by a further £1,000 from April next year. Large employers will also face a levy to fund apprenticeships, which will add to their costs but should help address skill shortages in some sectors. This initiative does not apply to Northern Ireland.
Scaling Back Reliefs
The Budget has significantly scaled back tax reliefs in certain areas, including reforming dividend tax, with tax rates on dividend income increasing. Tax relief on pension contributions for those with incomes over £150,000 is also being scaled back. Property landlords will soon only be able to off-set mortgage interest costs at 20%, rather than up to 40/45%. This will erode profitability in the buy-to-let sector and potentially provide another headache for those in negative equity.
As far as Budgets go, this was an action-packed fiscal affair, and very political, with the Chancellor effectively stealing the clothes of the centre left, and unveiling a Budget that surprised many. Indeed, more surprises are likely to be unveiled in the coming hours and days. As they always say, the devil will be in the detail.
Post by Richard Ramsey, Chief Economist, Northern Ireland Ulster Bank Group Communications, www.ulstereconomix.com