8 Jul 2015
UK Budget: an economy strong enough to cope with austerity – ING
FXStreet (Barcelona) - James Knightley, Senior Economist at ING, reviews the UK budget release, and further shares its implications on growth.
Key Quotes
“Chancellor Osborne has unveiled the first Conservative only Budget Statement for nearly 20 years, which has allowed him to implement the pledges made in the Party’s election manifesto. The bulk of the announcements were unsurprising, such as the £12bn of savings to the welfare benefit budget through cuts to tax credits and housing benefits. We also saw confirmation of the increases in tax free allowances and the level that the 40% tax rate kicks in along with the reduction in the pension relief allowance for the highest earners and an increase in inheritance tax thresholds.”
“However, there were some interesting new policy announcements, such as restricting the mortgage interest tax relief to the basic rate of tax for buy-to-let property investors. This may moderate property demand to some extent given buy-to-let investors now account for half of all UK property sales. We also saw the introduction of a new “living wage” set to 60% of median earnings (£9/hour by 2020), a reduction in the Bank levy and the abolishment of permanent non-domicile tax status.”
“Taking this altogether the policy decisions amount to a net fiscal tightening of £3.57 bn in the current tax year, rising to £18.885bn in 2020/21, with the overwhelming contribution coming from the £12bn in welfare spending cuts. Nonetheless, tax changes are still netting the Treasury an extra £1bn this year and £6.5bn by 2020/21, the largest contributor being the changes to pension tax relief for the highest earners.”
“In terms of the Budget’s implications for growth it is likely to be fairly minimal given the ongoing strong performance of the economy and employment and the fact that wages are finally starting to rise. Moreover, the tightening this year is equivalent to less than 0.2% of GDP, which was widely expected even ahead of the announcement. In any case, with government borrowing numbers for 2015/16 expected to now come in lower than the Office for Budget Responsibility predicted just over three months ago (£69.5bn versus £75.3bn), the Chancellor has greater room to offer more tax cuts and slower austerity in coming years. Indeed, the UK is now projected to be running a budget surplus by 2019/20.”
“With the OBR predicting relatively modest GDP growth versus our own forecasts, we suspect that the government borrowing figures could look even better, offering greater scope for some fiscal loosening in coming years. This, in turn, could at the margin result in a more positive environment for growth, which could increase the prospect of monetary tightening. Nonetheless, the potential risks from Greece and China mean we remain some way off from that.”
Key Quotes
“Chancellor Osborne has unveiled the first Conservative only Budget Statement for nearly 20 years, which has allowed him to implement the pledges made in the Party’s election manifesto. The bulk of the announcements were unsurprising, such as the £12bn of savings to the welfare benefit budget through cuts to tax credits and housing benefits. We also saw confirmation of the increases in tax free allowances and the level that the 40% tax rate kicks in along with the reduction in the pension relief allowance for the highest earners and an increase in inheritance tax thresholds.”
“However, there were some interesting new policy announcements, such as restricting the mortgage interest tax relief to the basic rate of tax for buy-to-let property investors. This may moderate property demand to some extent given buy-to-let investors now account for half of all UK property sales. We also saw the introduction of a new “living wage” set to 60% of median earnings (£9/hour by 2020), a reduction in the Bank levy and the abolishment of permanent non-domicile tax status.”
“Taking this altogether the policy decisions amount to a net fiscal tightening of £3.57 bn in the current tax year, rising to £18.885bn in 2020/21, with the overwhelming contribution coming from the £12bn in welfare spending cuts. Nonetheless, tax changes are still netting the Treasury an extra £1bn this year and £6.5bn by 2020/21, the largest contributor being the changes to pension tax relief for the highest earners.”
“In terms of the Budget’s implications for growth it is likely to be fairly minimal given the ongoing strong performance of the economy and employment and the fact that wages are finally starting to rise. Moreover, the tightening this year is equivalent to less than 0.2% of GDP, which was widely expected even ahead of the announcement. In any case, with government borrowing numbers for 2015/16 expected to now come in lower than the Office for Budget Responsibility predicted just over three months ago (£69.5bn versus £75.3bn), the Chancellor has greater room to offer more tax cuts and slower austerity in coming years. Indeed, the UK is now projected to be running a budget surplus by 2019/20.”
“With the OBR predicting relatively modest GDP growth versus our own forecasts, we suspect that the government borrowing figures could look even better, offering greater scope for some fiscal loosening in coming years. This, in turn, could at the margin result in a more positive environment for growth, which could increase the prospect of monetary tightening. Nonetheless, the potential risks from Greece and China mean we remain some way off from that.”