Budget 2016 Speculation Document

Dods Monitoring

March 2016

Introduction

The upcoming EU referendum has largely overshadowed the Budget in terms of media coverage in recent weeks.

One issue that has been generating headlines is policy on pension tax relief. After a lengthy and wide-ranging consultation, the Government has ruled out any changes – in this Budget at least – amid reports of a Conservative backlash.

By discounting that reform, George Osborne has restricted his options for raising the tax base. Instead, the chancellor paved the way for another austerity Budget when, in February, he said he “may need to undertake further reductions” to public spending in light of the “dangerous cocktail” of risks to Britain’s prospects.

The stakes are high for Osborne. He has gambled a huge amount of political capital on achieving a public finance surplus by the end of the decade – a surplus that is very vulnerable to changing forecasts. In November’s Autumn Statement, he received a windfall worth around £27bn over the parliament from Office for Budget Responsibility (OBR) projections, comprising higher tax receipts from VAT, income tax and corporation tax and lower debt interest payments. In the same statement, he spent that money on, among other things, scrapping cuts to tax credits and protecting police funding. That left him with a projected sur-plus of £10.1bn by 2019/20.

Some of the economic indicators since the last update suggest that target could be in jeopardy. The Institute for Fiscal Studies said if the Bank of England’s downgraded earnings growth projections were mirrored by the OBR, £5bn would be wiped off the 2020 surplus. One key number to look out for is £73.5bn, projected borrowing for 2015/16.

These forecasts are based on the assumption that Osborne will break the habit of a chancellorship and impose the first in-crease in fuel duty since 2010. With prices at the petrol pump low due to the fall in the oil price, many believe it is as good a chance as he will get to increase the tax – but it is a move that will trigger a backlash from ‘blue-collar’ Tories.

Osborne’s challenge is to create a narrative that does not focus on ‘surplus target in jeopardy’ (‘surplus target on track’ is a tricky sell to a front page editor) or on having to explain why he is making cuts now that he did not announce at the time of the spending review. Look out for accelerated tax cuts through rises in the personal allowance, the potential sale of more assets like Lloyds shares and possibly Channel 4, and trumpeting of the ‘Northern Powerhouse’ and ‘Midlands Engine’.

As ever, the policies, projections and Osborne’s own performance will play into analyses of a future Conservative leadership contest.

The Dods Monitoring team have compiled speculation on measures the chancellor may outline next Wednesday.

Business and Finance

General Taxation

Work and Pensions

Energy and Climate Change

Local government

The Arts

Science and Technology

Infrastructure

Stakeholders

By Josh May

News Editor, PoliticsHome

9 March 2016

Budget 2016: Speculation Business and Finance

Reduced business regulation

The CBI has called for a reduction in the financial and regulatory burden on business, starting by linking business rates to the consumer price index rather than the retail price index and taking small businesses out of tax altogether. The business secretary Sajid Javid announced a new Government plan to reduce £10bn worth of regulation at the British Chambers of Com-merce conference, further details could be announced in the Budget.

Lloyds shares

There is potential for an announcement on the sale of Lloyds shares with the sale due for the spring. This had been postponed until the markets became less volatile, but the chancellor will be keen for an injection of cash into the Treasury.

Start ups

Calls recently to lift the restrictions on family investment under the enterprise investment scheme and the seed enterprise in-vestment scheme. In response, Osborne said:

“I am sure my hon. Friend will understand that if he turns up on Budget day, he will see my response to it. The SEIS and EIS have been enormously successful. We have to make sure that the rules are tight enough so that they are supporting the kind of entrepreneurial activity we want, rather than being used as a vehicle for tax avoidance. I think we have got the balance right so far, but I am aware of good, positive proposals that people have put forward to improve it”.

Financial market review

Economic secretary Harriett Baldwin confirmed in a recent oral answer that the Financial Advice Market Review, would be re-porting around the time of the Budget. It could be that Osborne uses its findings to inform policy change within financial services.

Business taxes

The chancellor has been carrying out a review of the business rates system and will announce the result in the Budget. Ministers have drawn up proposals to exempt industrial equipment from business rates but apply only to new invest-ments, stopping far short of industry demands for an exemption for thousands of existing factories.

Local government

Osborne has promised a “localisation” of business rates, saying in the Spending Review that they would now be kept by coun-cils. This means councils will be able to keep 100 per cent of any additional business rates raised, through economic growth. Until recently, they could only keep half of this additional income. Osborne will announce more details on this implementation in the Budget.

Work and Pensions

Tax on company pension contributions

The Independent has reported the chancellor is considering taxing the contributions a company makes to an employee's pen-sion. The tax could be worth £5bn.

Pension taxation to remain unchanged

After speculation that the chancellor will scrap the current system which enables savers to claim tax relief at the rate they pay income tax on their pension contributions — whether that be 45, 40 or 20 per cent and introduce a flat rate of 25 per cent, plans now appear to have been scrapped. The Financial Times reported there would be a strong Conservative backlash to any such announcement.

Self employed

During a recent oral answer, Treasury minister Greg Hands noted that helping the self-employed was one of the Government’s key priorities and said MPs should “have to see what is in the Budget on 16 March.” Potential changes could perhaps take note of Julie Deane’s recommendations within her recent review into the area.

General Taxation

Income tax

Reports suggest the chancellor wants to accelerate progress towards the target of raising threshold for the 40 per cent higher income tax to £50,000 by 2020. We could see the Budget confirm increases to the income tax threshold.

Fuel duties

Given the plunge in oil prices, one could foresee an increase in fuel duties to off-set the impact on the balance sheets. Reports suggest that this could result in an additional two pence per litre on petrol being added, with The Times reporting a rise in fuel duty could help fill a £3bn hole in the country’s finances. By linking fuel duty to inflation, the Government could still argue they had frozen it in real terms.

Stamp duty

In December, the Government published a consultation on higher rates of Stamp Duty Land Tax (SDLT) on purchases of addi-tional residential properties. The Government is set to confirm the final policy design at the Budget on 16 March 2016.

Married couples tax

There have been calls for a further extension of the married couples’ tax allowance as recent data has suggested recently that uptake of the new tax break was a fraction of what was originally expected.

As it stands, critics of the tax break are claiming that the low participation rate shows that the measure is of no benefit to many families, while also being too meagre and paying out a maximum of approximately £4 a week—something Osborne could reme-dy in his statement.

Draft Finance Bill clauses

The Government has committed to confirming the majority of measures for inclusion in the Finance Bill at least three months prior to introduction of the Bill and the final contents of Finance Bill 2016 will be subject to confirmation at the Budget.

Growth forecasts and spending cuts

Reduced growth forecasts are predicted and many are expecting the OBR to confirm potential downgrades to their original pre-dictions as well as the potential of the chancellor having to adjust his borrowing forecasts.

Osborne has already laid the groundwork for further spending cuts in the Budget, warning in February that he would use the annual financial set piece to “look at public expenditure again” and that he remained determined Britain would “live within our means”. This came during a visit to China, which has been referenced in relation to global volatility.

The Arts The chancellor could potentially sell off Channel 4 to help balance the books in a time of slower growth and overshot forecasts - the deal could generate as much as £1bn for the Treasury. Whittingdale has said he is “looking at different options” to ensure the channel’s viability given the “very fast-changing and challenging environment” in the media industry.

Trevor Phillips, former chair of the Equality and Human Rights Commission, has warned that privatising Channel 4 would dam-age the broadcaster’s role as a leader in catering to minority audiences.

Digital Strategy

In December 2015 Culture and Digital Economy Minister Ed Vaizey heralded the Government’s five year Digital Strategy, which was due to be published early this year, but which has so far failed to materialise. Appearing before the Science and Technology Committee, Vaizey admitted the strategy was ready to be published in February but had been held up by Downing Street and the looming EU referendum. Responding to speculation from chair Nicola Blackwood on whether there would be funding attached to the strategy, Vaizey said there had been rumours this might appear in the Budget or spending review.

Education Given the recent elevation of higher education policy and funding announcements, and the publication of the Government’s green paper which is yet to receive a response, it is unlikely there will be any significant announcements in the Budget.

Energy and Climate Change North Sea oil and gas support

In the context of low oil prices the Scottish Government and industry body Oil and Gas UK have both called for further support for the North Sea oil and gas industry. Fiscal measures include a cut to the headline tax rate and tax relief for decommissioning activity. They have also called for non-fiscal support in the form of loan guarantees. The Government has not made any an-nouncements thus far. The Prime Minister and Exchequer Secretary to the Treasury Damian Hinds have both responded to questions in the House re-cently by highlighting tax changes made in the last year’s budget and emphasising that the “broad shoulders of the UK” were already behind the sector.

In a recent Westminster Hall debate on the industry, attended by Hinds, energy minister Andrea Leadsom was equally delphic.

She also highlighted past support and said whilst the Government would continue to listen to industry views, “fiscal changes are

not the only solution to the issues the industry currently faces”.

Business energy taxes

The Treasury launched a consultation last year on reforming the business energy efficiency tax and reporting system. It was due to report in time for the budget and the proposals suggested creating a single tax and single reporting system for energy saving and carbon reduction for businesses.

Any decision on the future of level of the carbon price floor and levy control framework spending could be made alongside this as called for by the CBI, EEF and Nuclear Industry Association.

Science and Technology In the 2016 Autumn Statement, the Government pledged to protect science resource funding at the level of £4.7bn in real

terms for the rest of the Parliament. A commitment was also made to assign £6.9bn to science capital, as stated in the Con-

servative manifesto.

However, concerns have recently been voiced about low government investment in R&D in light of it's potential to increase

productivity and innovation growth.

During a recent debate on the science budget, Nicola Blackwood, chair of the Select Committee on Science and Technology

used the opportunity to stress UK investment in R&D was internationally low at only 1.7 per cent of GDP in comparison to com-

petitors including Germany, China, Israel and Korea. She used the opportunity to press the Government to take up recommen-

dations from the committee and produce a road map to increase investment in R&D up to the three per cent of GDP EU target,

a third of which would come from public spending.

Further to this, there have been concerns about the announcement to replace £165m of government grants to Innovate UK and

the catapult network – who aim to strengthen R&D capacity and encourage innovation - with loans. Stakeholders such as the

CBI felt this move would “dampen bold and game changing innovation.”

However, Jo Johnson, Minister for Universities and Science has not been forthcoming about an announcement to increase

spend on R&D. He told the Commons on 2 March: “decisions on increases in the science spend are taken in spending reviews,

when it is weighed up against the other priorities for the nation.”

Health

Social Care

The Government has been looking at the way attendance allowance is devolved to local authorities through care budgets. Ru-mours indicate that the chancellor may make an announcement that attendance allowance could be devolved. Mental Health

With stakeholders calling for ring-fencing of children and young people’s mental health there is growing speculation about the budget allocation, with some fearing that local government funding settlements will absorb any announced funding. Following the conclusion of the children and young people’s mental health consultation in February the chancellor may make a further announcement on this, however whether budget ring fencing will be included remains to be seen.

Public health and staff

With the announcement that NHS England will launch a scheme to improve the health of its staff, there are rumours that the chancellor may build on this, particularly in light of recent Government Health workforce turbulence.

Social workers

While the Minister of State for Children and Families, Edward Timpson affirmed the Government’s commitment to overhauling the way social workers are educated, rumours are circulating over government plans to for the future of social work bursaries.

Answers from ministers on implementing the Child Protection Taskforce indicate that the Government may make an announce-ment on innovation in social work.

Tampon Tax

Whilst EU rules on the VAT charged on sanitary products remain, the chancellor announced at the Autumn Statement that the £15m collected from this would be donated to women’s charities. Further donation recipients will be announced at the Budget 2016.

Infrastructure The National Infrastructure Commission will report on three projects ahead of the Budget. The first report on Smart

Power recommended the Government should pursue additional interconnectors with other European countries, with the UK

becoming a world-leader in electricity storage systems.

Two further reports, on northern connectivity and transport infrastructure in London are expected imminently, which could in

turn allow the chancellor to make funding commitments on Crossrail 2 and east-west connectivity in the north.

Network Rail

Nicola Shaw’s review into Network Rail is expected to be published on the same day as the Budget, with speculation that some

of the Network Rail owned stations and lines could be sold. The organisation has begun selling off its electrical power assets.

Midlands Engine Investment Fund

In the 2015 Autumn Statement the chancellor announced an investment fund for the Northern Powerhouse. It is thought he plans to deliver something similar for the midlands region in order to improve its economic outcomes for small businesses. The fund was worth £400m to the North.

Apprenticeship levy

There is likely to be more clarification about the levy provision coming into force via the Finance Bill – the consultation closed on 2 March 2016 and the Government has suggested they have been actively listening to businesses on the issue.

Stakeholders

A number of stakeholders have written for PoliticsHome outlining what they would like to see from the chancellor:

Chris Leslie MP: As Osborne sets a Budget for his Party, Labour must earn the trust of the Country

Former Shadow Chief Secretary and Shadow Chancellor Chris Leslie writes ahead of the Budget: 'with the chancellor’s focus narrowing, Labour must show we can offer a credible alternative'.

Henry Smith MP: Air Passenger Duty must remain fair and consistent across the UK

Crawley MP Henry Smith calls on the chancellor to reduce Air Passenger Duty in the next Budget to counteract Scottish Gov-ernment plans to use new powers to reduce APD by 50 per cent in Scotland.

Chancellor must implement pensions and savings dashboard

Consumer group Which? calls on George Osborne to use next week’s Budget to create a tool providing people with a complete picture of all their pension pots in one place.

Dear Chancellor - Please get your FOBT sums right!

The Campaign for Fairer Gambling calls on the chancellor ahead of next week's Budget to consider increasing the remote gam-bling tax rate from 15 per cent to 20 or 25 per cent.

Scrap the tobacco tax escalator to protect independent retailers

The Tobacco Retailers’ Alliance writes ahead of the Budget and asks the chancellor to abolish the tobacco tax escalator or wit-ness even more independent retailers going out of business.

Chancellor’s £1.5bn investment plan may save social care – for now

Ahead of Budget Day, disability charity Papworth Trust calls for George Osborne to bring forward his planned £1.5bn invest-ment in the Better Care Fund.

Council Tax misuse hitting SME house builders

Ahead of the Budget Statement, Brian Berry, CEO of the Federation of Master (FMB) builders warns that Central Government must prevent local authorities from hindering SME developers with unfair Council Tax burdens.

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