United Kingdom: UK government vows to reach a fiscal surplus by the end of this Parliament
March 31, 2016
In early-March, Chancellor of the Exchequer George Osborne presented the Conservative government’s budget, which lays out the financial plan for this year and underlines strategies to eliminate the fiscal deficit by the end of this Parliament. Similar to the previous year, this year’s budget provides good news for savers and businesses. The presentation of the budget follows the release of the updated economic forecasts by the Office for Budget Responsibility (OBR)—an independent budget watchdog.
Some of the most important measures stated in the budget include the launch of a new Individual Savings Account (ISA) for adults under age 40, which will allow savers to receive a 25% bonus from the government on deposits of up to GBP 4,000 per year. Moreover, the government announced an increase of the personal allowance—the level at which workers start paying taxes—from the current level of GBP 10,600 to GBP 11,500 by April 2017. The Chancellor also stated that the Corporation Tax will drop from the current rate of 20% to 17% by 2020 and tax support will also be offered to the oil and gas industry. However, this will be partly offset by several reforms that will raise new revenues and target big corporations, in particular multinationals. Moreover, Osborne announced the introduction of the Sugar Tax—a levy on drinks with added sugar, while fuel duties were left unchanged for the sixth consecutive year.
Chancellor Osborne emphasized the government’s commitment to fiscal discipline by setting targets, which aim at closing the fiscal gap and reaching a fiscal surplus by the end of this Parliament. Osborne commented that the government will achieve this by incurring significant spending cuts in the next five years, such as reducing departmental capital spending and welfare spending and an increase in public debt, thus underlining a continuation of austerity reforms.
Amid low productivity in the domestic economy and a slowdown in the global economy, and under the assumption that the UK will vote to stay in the European Union on 23 June in the membership referendum, the OBR revised down its GDP forecasts for both this year and next. The official budget foresees the economy expanding 2.0% this year, which is down from the 2.4% increase projected in November. For next year, the OBR expects the economy to increase 2.2% (November’s forecast: +2.4% year-on-year).
Author: Dirina Mançellari, Senior Economist