Budget Analysis 2016

In broad terms, the Chancellor’s destination is the same now as it was at the time of the Autumn Statement. He plans to achieve a budget surplus by the end of this parliament, while reducing public spending as a percentage of GDP from 40% now to under 37% in 2020.
 
But whereas in Autumn he was buoyed by higher revenue forecasts and reductions in forecast debt interest repayments, the context to the Budget was much gloomier. Forecasts for economic growth have been revised down quite substantially, reducing government revenues and increasing the forecast deficit in each year until 2020.
 
In this gloomier context, how then does Osborne still plan to achieve his surplus in 2020? Partly by allowing big business to defer increased corporation tax payments until the end of the parliament, and partly by making some large spending cuts in that final, election year. The hope presumably, is that the economy will have revived sufficiently by then that these cuts can be avoided, but on current evidence that appears optimistic.
 
Many of the Budget measures will of course apply UK-wide, particularly those on tax, but some are likely to have a 'territorial' or Scottish dimension.
 
The introduction of a tax on sugary drinks, which will raise around £0.5bn, will be welcomed by the health lobby, and is presumably the sort of policy that would find support from the Scottish Government. It seems likely however that Scottish taxpayers may contribute a larger than population share of this new tax (given higher consumption of sugary drinks), but the Scottish Government will receive only a population share of the additional UK-wide revenues and spending through the Barnett Formula. In England, the additional revenues from this tax will be used to fund initiatives promoting physical activity among the young, but the Scottish Government will be able to spend its share of the additional revenues in anyway it sees fit. 
 
Changes to income tax include the much trailed increase to the personal allowance, and the rise in the Higher Rate threshold. Both are tax cuts, and benefit higher earners more than lower earners. Of course by 2017, income tax will be devolved to the Scottish Parliament. But whilst it could decide to reverse the increase in the Higher Rate threshold, it could not reduce the increase in the personal allowance (even if it wanted to).
 
More broadly, the OBR has revised down its forecasts of the revenues likely to be raised from devolved income tax in Scotland, as a result of both slower UK-wide economic growth, and the policy measures announced in the Budget. Scottish revenues from the 10p Scottish Rate of Income tax are forecast to be around £160m lower in 2020 than the forecast in the Autumn Statement. However, the Scottish budget is unlikely to face the full magnitude of this downgrade, given the way in which Scotland’s block grant will be adjusted.
 
Reductions in taxation of North Sea revenues were cautiously welcomed by the SNP, but were partly a political stunt by the Chancellor, allowing him to make vitriolic statements about the pooling and sharing of risks before what would have been ‘independence day’ on March 24th. The OBR forecasts that the prices of oil will remain around $40 per barrel over the course of the parliament, with North Sea activity bringing very little revenue to the Treasury. As a result, these cuts cost the Treasury around £200m per year, fairly little in the scheme of things.
 
The Chancellor also announced cuts to business rates, focussed on smaller businesses, whilst at the same time devolving the revenues to local authorities (a de facto spending cut for local government). While this policy is applicable to England only, the next Scottish Government is likely to face pressure from business to follow suit. John Swinney announced a review of business rates in Scotland when he delivered his budget in December.
 
Ultimately, the destination of this Budget is no different from the destination of fiscal surplus the Chancellor set sail for in his Budget last summer. Downgrades to forecasts means the journey now looks tougher. For now, the Chancellor is banking on economic revival if he is to arrive at a fiscal surplus in 2020 without further spending cuts at the end of the parliament. 
 
Over the coming days, analysts will pore over the Budget detail. But perhaps the biggest question is still whether the final destination is the right one. With government borrowing costs at an all-time low, relaxing the fiscal surplus rule to allow for higher capital spending would seem a sensible strategy – and one that would help future generations more effectively than the announced ‘Lifetime ISA’ schemes for under-40s which only the relatively better off will be able to afford.
 

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David Eiser's picture
post by David Eiser
Fraser of Allander Institute
16th March 2016
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