SMF response to Budget 2016: A cautious Budget from a ‘Tinkerman’ Chancellor
Emran Mian, director of the Social Market Foundation (SMF) think tank, responded to the 2016 Budget by saying:
“This was a cautious budget from a ‘Tinkerman’ Chancellor. It lacked a single bold signature measure, like the National Living Wage from last year’s Autumn Statement, while a radical move on pensions reform was dropped because there was ‘no consensus’.
“Elsewhere, several measures are either being phased in or are fairly minor in scale: the soft drinks sugar tax won’t be introduced for two years. Support for digital entrepreneurs shows that the Treasury is making an effort to understand the gig economy but this is small beer, only a small measure to try to stimulate it.
“Similarly, the Lifetime ISA could signal the beginning of a radical change in savings policy, but again, this is a toe in the water.
“Some business groups had called for more fundamental reform of business rates, yet the Chancellor stuck to providing some tactical relief to the very smallest businesses.
“Overall, this felt like a budget from a Chancellor looking over his shoulder at his own backbenches – look at how he had to deliver on tax cuts despite the worsening outlook for public finances – and peering rather fearfully ahead to a future of lower growth.
“This lower growth could pose a real problem for the Chancellor when it comes to paying for the ambitious plans around 5G and Northern infrastructure projects.”
OBR gloom means hard fiscal decisions kicked into the long grass
Nida Broughton, SMF chief economist, commented:
“The Chancellor says he has taken “decisive action” in the face of the OBR’s gloom over the economy and the public finances. In reality he is postponing the hard decisions over where savings are to be made until the end of the Parliament in 2019 and 2020. Given the prospect of a potential promotion on the horizon, that’s not a bad career move. And we mustn’t forget the huge uncertainty in the growth forecasts. In a few Budgets’ time – or even a few months’ time – the picture could change all over again.”
“He might even be hoping that some hard decisions might never need to be faced. After all, it is only four months since the last forecast, and the numbers have changed by billions. Who knows how his luck could turn in a couple of Budgets’ time – or even in a few months?”
Income tax changes more generous to those at top of income distribution, low earners see little benefit
Commenting on income tax changes announced by the Chancellor, SMF Researcher Ben Richards said:
“The Chancellor is moving towards meeting the Conservatives’ manifesto commitments on Income Tax. These will be of little or no benefit to low earners since most already don’t pay Income Tax. Other measures, such as raising the primary threshold for National Insurance or lessening cuts to Universal Credit would have been much more beneficial for low earners.
“Middle earners will benefit from the increase in the Personal Allowance, and stand to gain £180 by April 2017. However, the changes to the higher rate threshold won’t benefit middle earners – less than 20% of employees earned enough to pay the higher rate in 2014. The main beneficiaries of the changes will therefore be high earners, with those earning between £45,000 and £100,000 receiving an Income Tax cut of £703.”
“It’s worth noting that these changes will be partially offset by increasing the National Insurance Upper Earnings Limit in line with the Income Tax threshold. This means that, for instance, an employee paying higher rate tax would lose around £260 of the gains from the tax cut in increased National Insurance payments.”
Lifetime ISA: The quiet introduction of a radical new type of pension provision?
Commenting on the new Lifetime ISA, SMF economist Katie Evans, said:
“The Chancellor has once again demonstrated his determination to back savers with measures including raising the tax-free ISA savings allowance to £20,000 a year, and introducing a new “Lifetime ISA” for under 40s. This product will allow younger people to save up to £4,000 a year and receive a 25% government top up at the end of the tax year. They can then use the cash to buy their first home, or keep saving for retirement. The only catch is a 5% fee as well as loss of the bonuses if you withdraw for a purpose other than buying your first property before age 60.”
“Another ISA-family product is always a fair bet in a Budget – we know that consumers are fond of the label. And it’s great to see the government firmly recognising the value of matching incentives for savers, rather than tax relief. We now have matches across a group of products aimed at younger, lower income consumers who often struggle to save, and know the immediacy of a match does much more to encourage them than the distant promise of tax-free interest.
“At first glance, the Lifetime ISA is an extension of the popular Help to Buy ISA, offering the same level of government match but on a higher sum. But the ‘lifetime’ element marks a much greater departure by the government. We could actually be seeing the quiet introduction of a new type of pension provision, a move to tax income before it’s paid in, rather than on withdrawal. With the relatively low annual allowance this isn’t a jump straight to a Pensions ISA system, completely in competition with the current model, but it does look like the government testing a more radical idea in the extension of an existing, popular policy.
“Mr Osborne may find that we need to be even more flexible about when people access funds, however. Previous SMF research suggests that a significant number of consumers drop pension savings in their mid-30s, as the pressures of raising a family cut spending power. To keep people involved in long-term saving, it’s worth considering allowing families to save in these efficient investment products for other big life-cycle expenses too, like child care or care for elderly parents.”
Further delays on Network Rail reform
Nicola Shaw’s Review of Network Rail reported with the Budget. The government has welcomed the recommendations and will respond fully later in the year.
Nigel Keohane, research director at the SMF, commented:
“The reform of Network Rail potentially offered the Chancellor an option to remove £38 billion of debt from the government’s balance sheet and a huge windfall from rail privatisation to time nicely with his deficit target in 2019-20. However, the review of Network Rail from Nicola Shaw rules out wholesale privatisation of the rail tracks.”
“The government will now be looking predominantly at proposals to reform Network Rail as an institution rather than a big shift in ownership of the track.”
“But opponents of privatisation shouldn’t celebrate too soon: beneath the surface may lurk potentially dramatic shifts. The review speaks of ‘possibilities of third party funding and financing of enhancements’ and voices interest in the potential of rail concessions or long-term licenses to manage track. This includes the prospect of concessions for a whole route. Such steps would be good for efficiency, for innovation and for investment. In the longer term, they may also enable re-classification of the debt associated with those parts of the network.”
“A route for the north is already being promoted to promote greater coordination between Network Rail, operators and other transport systems. Don’t be surprised if we soon see demands for total responsibility for rail to be handed over to Transport for the North as the Chancellor continues his encouragement for the Northern Powerhouse.”
Notes to editors:
- About the Social Market Foundation:
The Social Market Foundation (SMF) is a centrist non-partisan think tank. We believe that fair markets, complemented by open public services, increase prosperity and help people to live well. We conduct research and run events looking at a wide range of economic and social policy areas, focusing on economic prosperity, public services and consumer markets. We engage with policymakers and opinion formers, including Ministers, MPs, civil servants, regulators, businesses, charities and the media. The SMF is resolutely independent, and the range of backgrounds and opinions among our staff, trustees and advisory board reflects this.
- To interview a member of the SMF research team or for further details about this release, please contact Sean O’Brien via email@example.com or 020 7222 7060.