This Budget more than any of the Osborne Budgets that went before it had one eye on the election. Previous Budgets focused on protecting the older generation, and again we saw this today with the confirmation of more pension flexibility for those people with annuities. However the younger so-called ‘jilted generation’ also featured on two key fronts – first of all, with employers national insurance contributions waived for under 21s and an additional waiver for employers hiring young apprentices next year; and secondly with the Help to Buy ISA, through which first time buyers will receive a bonus of up to £3,000 for saving for a deposit.
While this is welcome and will undoubtedly be attractive to many first time buyers, in Northern Ireland it is perhaps less economically significant than in the South East of England, as the issue with the local housing market is that there are too many potential home movers in negative equity or with not enough equity to move.
Raising Personal Allowance
As in previous Budgets, the Chancellor has continued his theme of raising the personal allowance. Given that Northern Ireland has lower average incomes than the rest of the UK, an increasing number of individuals locally will be taken out of income tax altogether.
Over the next 24 hours, the media headlines around the Budget are likely to focus on populist measures like the beer duty reduction and the Help to Buy ISA. However, attention will quickly return to the public finances. While these are improving, as the Chancellor highlighted today, the challenges of reducing our debt burden and cutting public expenditure remain.
Indeed, there are an additional £12 billion in welfare spending cuts included in the Budget, which will bring further financial and political challenges for Northern Ireland in particular.
While the pace of austerity appears to have eased relative to the Autumn Statement back in December, people should be under no illusion – the UK faces a second Parliament of fiscal pain. Such a scenario was flagged five years ago by the Institute for Fiscal Studies (IFS). Day-to-day public spending is facing cuts in 2016/17 and 2017/18 that are more than twice what has been experienced on average over the last 5-years.
Effectively, the 2015 General Election has acted as a speed camera for the pace of austerity, and after May the austerity accelerator will have a heavy right foot on it again. It is likely that the most unpalatable medicine will be delivered at the start of the fixed 5-year Parliament.
Regardless of who wins the next election, a second ‘Emergency Budget’ is expected in June. Public spending growth is not expected to return until 2019-20. We also will face a Spending Review in the autumn. It is noted that in the first so called Parliament of pain, record low interest rates and a weak currency provided much needed tailwinds to the economy. Looking ahead into the second Parliament of pain, the public expenditure cuts for day-to-day spending will be deeper than experienced to date and the sterling / euro exchange rate is now a headwind not a tailwind.
Furthermore, it would be overly optimistic to assume that interest rates will remain on hold for another 5 years as has been the case for the last 6 years. Austerity may be easing and economic growth remains robust. Enjoy that combination while it lasts.