Economic outlook remains tough but Chancellor has done what he can to help people who work hard
Today, the Chancellor gave his fourth Budget.
Over the last three years, he’s made progress in fixing our country’s economic problems. The deficit is now down by a third. There are 1.25 million more jobs.
But the international economic outlook remains bleak so progress has been slower than expected. Growth in the US and Japan was flat in the last quarter, while the eurozone shrank by 0.6 per cent - the largest fall since the height of the financial crisis. This meant that we exported less than expected and as a result our economy grew by less than expected. This in turn meant that the deficit fell by less than expected.
The independent Office for Budget Responsibility (OBR), which produces the forecasts on which Budgets are based (under Labour, the Government used to produce its own forecasts), has again revised down its forecasts for global economic growth. They warn that “the underlying situation remains very fragile”. They predict that the eurozone will remain in recession throughout this year, but that the UK will do slightly better growing by 0.6 per cent and then by 1.8% in 2014 and 2.3% in 2015.
On the jobs front, the picture is more encouraging. For every job lost in the public sector in the last year, the private sector has created six jobs. The employment rate has been growing faster than in the US and three times as fast as in Germany; unemployment is now lower than when this Government came to office. So despite the weaker growth forecasts, the OBR have revised up their forecasts for employment. They expect the economy to create 600,000 more jobs in 2013 and for unemployment to fall by 60,000.
Some people have argued that the Chancellor now needs to make much harsher cuts to get the deficit down quicker. He rejected that option because of the weakness of the international economic situation.
Others have argued that he now needs to borrow more - increasing the deficit - to pay for tax cuts, more spending or a combination of the two. We’d all like to pay less tax and we’d all like more spent on the services we use but in our heart of hearts most of us know that there is no easy way out of the mess we are in. If we gave up on trying to live within our means, the markets would lose faith in our ability to ever repay our debts and the interest rates we would have to pay to borrow the money would shoot up, which would be disastrous both for anyone with a mortgage and for the economy as a whole.
The Chancellor is right then to stick to his plan. But he did need to do something today to help people who work hard and are struggling to make ends meet and to boost long-term growth. So he announced some small further cuts in government revenue spending to pay for some tax cuts and additional investment.
Most departmental budgets will be reduced by 1 per cent in 2013/14 and 2014/15, though the school and health budgets will be protected and the local government and police budgets will be protected in the first year. He is also reducing government spending by a further £1.5 billion in 2015/16 (he has not yet set the individual departmental budgets for this year). He said the Government had identified a further £5 billion of efficiency savings and would also be limiting public sector pay increases to 1 per cent in 2015/16 to try to ensure that these reductions in spending don’t impact frontline services.
So what’s he using the money he saves by making these cuts for?
Well first, he is increasing spending on infrastructure by £3 billion a year from 2015/16. This will mean that government spending on infrastructure (as opposed to day-to-day spending) as a proportion of national income will be higher than it was in the whole period of the Labour Government.
He’s also cutting taxes on businesses. When this Government came to power, Corporation Tax was 28 per cent. The Chancellor has already cut it to 21 per cent; today he announced a further 1p cut, giving the UK the lowest business tax of any major economy in the world. This should make us the most attractive place for businesses to invest and create jobs. But whilst it is right to cut rates, it is equally important to make sure that businesses pay the taxes that are due. To that end, the Chancellor set out one of the largest packages of anti-tax avoidance and evasion measures ever announced in a Budget.
Not only is he cutting taxes on business profits, he is making it cheaper for businesses to employ people by introducing an Employment Allowance. This will take the first £2,000 off the Employers National Insurance Contributions (NICs) bill of every company. 450,000 small businesses will pay no Employers NICs - effectively a jobs tax - at all. If you are starting a business, you’ll be able to hire 4 people on the minimum wage and pay no jobs tax.
He announced a package of measures to help people buy their home and boost the construction industry. In the past, help has only been available to first time buyers with a household income of less than £60,000; now the Government will put up a fifth of the cost of any newly built home worth less than £600,000 in the form of a loan which is interest free for five years and is repaid when that home is sold. And the Government will also help anyone who can afford a mortgage but not a big deposit by putting £130 billion into a Mortgage Guarantee that should allow lenders to offer mortgages without requiring huge deposits.
And finally he announced three tax cuts to help hard-working people who are struggling to make ends meet. He cancelled the increase in fuel duty which the Labour Government had built into government spending plans for this September. As a result of decisions he has taken over the last three years, petrol is 13p per litre cheaper than Labour were planning. For a typical car like a Ford Focus, that’s £7 less every time you fill up. He scrapped the beer duty escalator which again the Labour Government had built into government spending plans which would have meant a 3p increase in duty and instead cut duty by 1p. And he announced that from next year the personal allowance (the amount we can all earn before we start paying income tax) will be increased to £10,000. When we came to power it was £6,475. The increase to £10,000 will means 2.7 million of the lowest paid people in this country will no longer pay income tax and represents a £700 tax cut for hard-working people.
The message of this Budget is clear. We face tough times. There are no easy answers. We must start to live within our means. But if you’re working hard and struggling to make ends meet, if you want to own your own home, if you run a business and want to give someone a job, this Government is on your side.