United Kingdom: UK government presents 2015 budget, pledges to close the fiscal gap before the end of the next Parliament
March 30, 2015
On 18 March, Chancellor of the Exchequer George Osborne presented the 2015 budget to the Parliament. The budget provides good news for savers and continues the reforms to pension regulations and the housing sector. While this year’s budget doesn’t bring major changes to the table compared to that of the previous year, it does represent a test for the governing party ahead of the 7 May general elections. The presentation of the budget follows the release of the updated forecast for the British economy by the Office for Budget Responsibility (OBR), an independent budget watchdog.
The government announced that the minimum wage will increase by 3.1% starting in October 2015, rising from GBP 6.49 per hour to GBP 6.70 per hour, which represents the largest real-term increase since 2006. The budget also envisions several changes to saving incentives such as increasing the tax-free personal allowance to GBP 10,800 in 2016/2017 and to GBP 11,000 the year after, as well as introducing a new personal saving allowance of GBP 1,000 for interest receipts. The budget introduces pension reforms which, starting in April 2016, will give pensioners with income from an annuity the option to turn it into a cash lump-sum.
To continue supporting the housing sector, the government will introduce the Help to Buy Individual Saving Accounts (ISA) scheme, which will help first-time home buyers save for a deposit. Under the new regulations, first-time buyers will be eligible to get a GBP 50 bonus from the government for every GBP 200 they save. The bonus can go up to GBP 3,000. Help to Buy ISA is an extension of the existing Help to Buy program, which allows people to purchase a house with just a 5.0% deposit.
Chancellor Osborne stated that the government will continue to prioritize fiscal discipline by setting targets for the following five years, which aim to close the fiscal gap and bring down the level of public debt. As a result, for this year, total expenditure is expected to decrease to 39.6% of GDP, which is down from the previous year’s 40.7% of GDP. Public debt as a percentage of GDP is projected to fall marginally this year to 80.2% before dropping to 71.6% of GDP in FY 2019/2020. Furthermore, public finances will return to surplus in FY 2018/2019, which will be before the end of the next parliament. The fact that this year’s budget introduces few changes compared to that of last year might jeopardize the government’s position ahead of the elections. Rob Wood, Chief UK Economist at Berenberg, comments:
“Mr. Osborne’s decision to present a fiscally neutral budget this close to an election could be described as risky. From a macroeconomic perspective, none of Mr. Osborne’s policy measures amounted to much. […] Perhaps, the most incredible was yet more help for home buyers, by providing a tax rebate on saving earmarked for a house deposit. “
The OBR revised its growth forecast for 2015 upward and now expects the economy to expand 2.5% in 2015, which is an improvement over the 2.4% growth foreseen in its Autumn Statement. 2016’s growth forecast was also revised up to 2.3%. In addition, it forecasts a structural budget deficit of 2.1% of GDP (Autumn Statement: -2.2% of GDP) this year and 0.4% of GDP (Autumn Statement: -0.5% of GDP) next year.
Author: Dirina Mançellari, Senior Economist