United Kingdom Fiscal

United Kingdom

United Kingdom: Emergency budget sees pace of fiscal tightening reduced, sets new living national wage and lower corporate tax

July 8, 2015

On 8 July, Chancellor of the Exchequer George Osborne presented the so-called emergency budget, which updates the provisions of the pre-electoral budget approved in March taking into account the result of the May elections in which the Conservatives won the majority of the vote. The March budget had in fact been presented by the then-governing coalition of Conservatives and the Liberal Democrats: the July budget represents the first Conservative-only budget in almost 20 years.

One of the most important innovations of this year’s budget was the introduction of a compulsory national living wage of GBP 7.20 an hour for all workers over the age of 25 (it will reach GDP 9.00 per hour by 2020). The measure, which will take effect beginning April 2016, partially offsets a freeze in work benefits for the next four years and basically equates in all but name to an increase in the national minimum wage.

In continuation with the March budget, the government announced several changes to saving incentives such as increasing the tax-free personal allowance to GBP 10,800 in 2015/2016 and to GBP 11,100 in the following fiscal year, frontloading this measure by one year compared to the previous budget document. In addition, the threshold for the 40% higher marginal income tax rate will rise to GBP 43,000 next year from GBP 42,385. Most relevant for companies was the announced cut in the corporate tax rate, which will be brought to 19% in 2017 (18% by 2020)—though, even today, at 20%, the tax corporation rate is already one of the lowest in the G8.

While targets presented in the budget were broadly unchanged in terms of borrowing and public debt, the new document foresees a more gradually-paced reduction in the size of the budget deficit, as the government moved the target for a budget surplus out by one year from FY 2018/2019 to FY 2019/2020 (end of the current Parliament).

In line with presentation of the budget, the Office for Budget Responsibility (OBR)—the independent budget watchdog—released updated projections for the British economy. The OBR revised its growth forecast for 2015 slightly downwards and now expects the economy to expand 2.4% in 2015, which is down from the 2.5% growth foreseen in March. 2016’s growth forecast was kept unchanged at 2.3%. In addition, it forecasts a structural budget deficit of 1.7% of GDP (March: -2.1% of GDP) this year and 0.5% of GDP (March: -0.4% of GDP) next year.

While analysts believe that some of the approved measures may support growth, the fiscal drag will still be substantial and protracted longer than in the provision of the March budget. While the budget is broadly neutral in terms of impact on monetary policy, some analysts believe that it could lead the Bank of England to act sooner in terms of a rate hike. According to James Knightley, Senior Economist at ING:

“With the OBR predicting relatively modest GDP growth versus our own forecasts, we suspect that the government borrowing figures could look even better, offering greater scope for some fiscal loosening in coming years. This, in turn, could at the margin result in a more positive environment for growth, which could increase the prospect of monetary tightening. Nonetheless, the potential risks from Greece and China mean we remain some way off from that.”

FocusEconomics Consensus Forecast panelists expect the budget deficit to shrink this year to 4.3% of GDP. For next year, the panel projects a shortfall of 3.0% of GDP.


Author:, Senior Economist

Sample Report

Looking for forecasts related to Fiscal in United Kingdom? Download a sample report now.

Download

United Kingdom Fiscal Chart


United Kingdom Public Debt July 2015 2

Note: Fiscal Balance as % of GDP.
Source: Eurostat


United Kingdom Economic News

More news

Search form