The Chancellor announced a move to a ‘lower welfare, lower tax Britain’ with tax cuts for the middle classes alongside the cutting of benefits to lower paid workers and welfare recipients (albeit at a slower pace than was previously suggested).
Softening the narrative of “cuts”, the Chancellor announced a new National Living Wage of £7.20 from 2016, eventually increasing to £9 an hour, a move that will be welcomed on both sides of the Commons but not by many employers who may have concerns with the burdens it impues. In addition, a significant rise in the personal tax allowance will help sweeten the message, with the Chancellor pledging a raise in the personal tax allowance to £12,500, beginning with an increase to £11,00 next year, which would take most lower paid workers out of income tax altogether. Higher paid earners will also welcome the plans to rise the 40p tax rate from next April with a promise of it reaching £50,000 by 2020.
The Chancellor also set out measures to boost productivity alongside bold moves on education and English devolution. As anticipated, the ‘Northern Powerhouse’ was again a key theme, this time accompanied by the ‘Midlands Engine’, reflecting the influence of Bromsgrove MP and Secretary of State for Business, Sajid Javid, on the Chancellor’s devolution priorities.
Today George Osborne certainly seized the opportunity to frame the terms of the debate for the next ten years. Spurred on by the Conservatives’ election victory, a working Government majority, not yet eroded by the ups and downs of governing, and an effectively inert Opposition. He was also looking to firmly entrench his position at the front runner to replace the Prime Minister in a few years’ time and today, at the despatch box, the Chancellor did just that.
Key things you need to know about the Summer Budget
1. Growth and the economy
The Growth forecast remains at 2.3% for this year and is revised up to 2.4% next year.
There will be a smoothing out of the deficit cutting ‘roller coaster’ to move to a surplus by 2019-20, one year later than promised at the General Election. The Chancellor also said that there should be a surplus in ‘normal economic times’.
2. Income Tax
The Chancellor pledged to raise the personal tax allowance to £11,000 next year, with a view to eventually increasing it to £12,500. The threshold at which people start paying the 40p rate is set to increase to £43,000 next year, a start on the Conservatives’ commitment to increasing it to £50,000.
3. Inheritance Tax
The inheritance tax threshold is set to increase to £1million for couples from 2017. This new “family home allowance” will be worth £175,000 per person and will come on top of the existing £325,000 tax free allowance.
This is to be paid for by the pension tax relief given to the highest earners. From next year their Annual Allowance will be tapered away to a minimum of £10,000.
4. A new national living wage
The Chancellor announced a new national living wage of up to £9 an hour by 2020, to start next April at £7.20 an hour. This will be compulsory for all over-25s.
5. Business Tax
Corporation tax will fall to 19% in 2017 and 18% by 2020.
The Dividend tax credit will be replaced by a £5,000 tax free allowance. The Annual Investment Allowance will be set at £200,000.
6. Fiscal mandate
The Chancellor has pledged to change the nation’s fiscal mandate to run a budget surplus in “normal times”, without raising rates of VAT, National Insurance or income tax.
With borrowing this year likely to be lower than expected in the March Budget, the Chancellor should be able to scale back some of the harsh cuts planned for 2016-17 and 2017-18.
7. Pensions Tax Relief
Pensions tax relief available to the highest earners is likely to be cut from £40,000 to £10,000 a year on a sliding scale, with a potential cost of £13,500 to anyone earning £210,000 or more.
8. Housing tax relief changes
The Chancellor said he will create a ‘more level playing field’ on buy-to-let through residential property mortgage interest relief being restricted to the basic rate of income tax.
Room relief will be raised to £7,500.
9. Tax Avoidance
There will be a further clampdown on wealthy individuals claiming ‘non-domicile’ status which will see the abolition of permanent ‘non-dom’ status – as part of a £5billion clampdown on tax avoidance.
Serial users of failed tax avoidance schemes will be named and shamed under new plans.
10. Spending and Welfare Reform
The Chancellor set out the need to find £37bn of cuts in this parliament, saying that he would smooth the rate of cuts.
Britain’s benefits bill will fall by £12billion over the next two years. George Osborne said he had “found” the savings, through limiting tax credits and Universal Credit to families with two children, and cuts to housing benefit. Automatic entitlement to housing benefit will be removed from those aged 18-21 claiming Job Seeker’s Allowance.
There will be 30 hours of free childcare for working parents with 3 and 4 year olds.
The benefits cap per household will fall from £26,000 to £23,000 in London and will fall to £20,000 in other areas of the UK where the cost of living is less.
He also announced an additional £8bn of funding per year for the NHS.
The BBC will be expected to take on the £650 million-a-year bill for providing free television licences for the over 75s by making cuts to its own budget.
12. Taxation of banks and insurers
The bank levy rate will be reduced over the next six years but the Chancellor will introduce an 8% surcharge on bank profits from next year.
A major review of claims management companies will take place and there will be an increase in insurance premium tax to 9.5% from November.
13. Vehicle Excise Duty
There will be new VED bands from 2017 for new cars, with no increase in tax for existing cars, which will pay for a new roads fund. There will be no changes to fuel duty which will be frozen this year.
14. Apprenticeships Levy
There will be a new apprenticeships levy on all large firms to create 3m new apprenticeships. Osborne stated that skills will be an important part of the Government’s productivity plan.
15. The Northern Powerhouse and Devolution
More detail was set out on the Northern Powerhouse with further powers to be devolved to Greater Manchester. More powers will also be given to Cornwall. He stated the Government was working towards city devolution plans with other cities such as Sheffield, Liverpool and West Yorkshire, in return for the introduction of directly-elected mayors. In addition, local areas will also be able to decide Sunday trading hours.
Osborne pointed to the potential benefits of Transport for the North, and outlined investment in transport in the Midlands and South West. An oyster-style integrated ticketing system will be introduced in the North of England.
He stressed the importance of investing in the capital through projects like Crossrail 2 and the Olympic Villages, mentions that had Boris Johnson MP beaming from the audience.
On the issue of productivity, Osborne stated that it was essential in making Britain the most prosperous and affluent economy. He announced a Productivity Plan would be laid out on Friday 10July.
17. Universities and Students
The Chancellor stated that the artificial cap on student numbers would now be removed following the success of their university funding reforms. He also announced that from 2016-2017 students’ maintenance grants would be replaced with loans for new students, with these only being paid back after achieving an annual income of £21,000.
18. Defence Spending
On national security, he announced the Government would commit additional resources. There would be a real term budget increase every year and joint security fund of £1.5 million would be established.
He stated that counter-terrorism efforts and the aid budget would be protected, and the Government would enshrine the NATO pledge to spend 2% of GDP on defence.