UK deficit – can Govt budge it?

The Chancellor’s Budget held few surprises, retaining its central plank of continued austerity

Suren Thiru
Suren Thiru

The Budget delivered by Chancellor of the Exchequer George Osborne contained no real surprises as the Coalition reaffirmed its commitment to debt reduction as its key priority.

In terms of specific measures, this was essentially a ‘fiscally neutral’ Budget, with giveaways paid for by reductions elsewhere. There were, however, some notable policy announcements.

Although many of the headlines surrounded the change to pensioners’ tax allowances, dubbed the ‘granny tax’, for the majority of Britons the biggest announcement was the increase in the income tax personal allowance. This was already due to rise to £8,105 from April and the chancellor revealed an additional increase in April 2013 to £9,205. The improvement in spending power is likely to be significant, with the Government estimating that taxpayers will gain £170 a year after inflation.

The chancellor did his bit to help businesses and encourage investment by cutting the UK’s corporation tax rate from its current 26 per cent to 24 per cent in April, rather than ­reducing it to 25 per cent as previously announced. The corporation tax rate will then fall to 23 per cent in 2013 and 22 per cent in 2014.

There were also measures aimed at the wealthiest. The top rate of ­income tax, covering those earning more than £150,000 a year, was cut from 50p to 45p from April 2013, with HM Revenue & Customs’ analysis suggesting that the cost to the exchequer of reducing the rate will be only £100m a year. In some cases this benefit may well be offset by the increase in stamp duty, from 5 to 7 per cent for homes worth more than £2m. This increase will see the ­average stamp duty bill for such properties jump by 40 per cent.

However, the overall impact on the housing market is likely to be limited, with less than 0.5 per cent of UK homes affected by the increase. A 15 per cent levy was also introduced for those multimillion-pound homes that are bought through a company.

Alongside the Budget, the latest economic forecasts from the Office for Budget Responsibility (OBR), the official independent fiscal watchdog, revealed that little has changed in the economic or fiscal outlook for the UK since the last forecasts were made in November. The forecasts showed a slight improvement in economic growth this year, although the overall view essentially remains one of a weak UK economic recovery for 2012.

Given the relatively unchanged economic forecast and the fiscally neutral set of policy measures, the outlook for public finances remains broadly unaltered; the OBR believes that the Government is still on course to meet its fiscal targets of eliminating the structural deficit and setting net debt on a downward trajectory within five years.

Overall, the Budget was the rather low-key affair that many expected, as the chancellor declined the opportunity to make any major changes and reaffirmed the Government’s commitment to its existing austerity plan.

As such, the focus over the next 12 months will be on whether the UK economy will grow sufficiently to generate the revenue necessary to meet the Government’s planned deficit reduction and allow the UK to hold on to its triple-A rating in 2012.