A budget with some positive steps
I think the initial reaction to the budget is that it was fairly measured and the economy is continuing to improve pretty much on the back of the pickup of what we're seeing in Europe, as we've highlighted a number of times in the past, with growth rates being revised up to 2.7% from 2.4% with the Autumn update.
So, George Osborne wasn't really in a position where he could give away too much, however, what we've seen is encouraging. We've seen a doubling of the investment allowance for businesses and clearly we need to get businesses spending more – this has been the one thing that has been absent in the recovery to date is business investment from the corporate side.
We also need to see general improvement in the corporate outlook so that some of the companies that are more exposed to exporting activities can improve – that's another thing which has been absent. We have the corporation tax decrease coming in, again, which was announced in a previous budget which is also pro-business.
On a personal point of view, and for individuals, we've seen some pretty interesting announcements – the ISA allowance being increased to £15,000 is a positive initiative, a simplification in the administration by merging cash ISAs and stocks and shares ISAs. This is also positive and also some fairly radical pension reform in the change to the requirements to buy annuity – that's been removed for pensioners.
The greater flexibility in terms of withdrawing more from pensions and being able to do that without attracting a penal tax rate of 55% and will now be at the marginal tax rate so, again, pensioners hold a lot of the savings that we're seeing and there's now more of an incentive for them to take some of their money out of their pension funds and spend it.
Chancellor George Osborne's challenge throughout his tenure has been to balance the need to cut back on spending so as to reduce the UK's considerable deficit, while at the same time keeping enough stimulus in the economy so as to lift us out of the post financial-crisis downturn. While we are still concerned about the UK's finances, the Government's budget policies have been broadly successful in boosting the economy. The Chancellor noted today that gross domestic product is forecast to grow by 2.7% this year and 2.3% next year.
One of the most significant changes announced today is to the Individual Savings Account (ISA) scheme, where Osborne has merged the cash ISA and stocks and shares ISA into one tranche, and boosted the limit to £15,000. One of the problems of recent years in our economy was an over-reliance on consumption and not enough effort made to encourage saving -- a balanced economy needs to make sure people put aside money for the future.
Another encouraging change announced today is to liberalise how people can spend defined-contribution pensions, and lowering the punitive tax rates they pay on them. This should help increase spending within the economy as it means people can choose to spend their savings as they see fit with a lower tax burden. The removal of the need to purchase an annuity also provides much more flexibility and will importantly increase the appeal of pensions more generally.
Other changes flagged in advance of the statement are encouraging; the decision to reduce the interest on export finance will help domestic businesses sell abroad, an area where we have lacked success as a nation. And new incentives for companies to increase investment expenditure will also help tilt the economy away from its reliance on consumer spending.
There are signs that the Chancellor is beginning to have some success in reining in spending, with the Government due to post a surplus in 2018. Osborne has committed to introduce a new charter for budget responsibility in order to lock in future administrations to lower spending limits.
The most successful and well-targeted of the Government's plans has been the Help-to Buy scheme, which has been extended until 2020. Set up last year at a time when banks were struggling to finance would-be homebuyers, it has clearly helped increase demand in the housing market. With property the most valuable asset held by most people, increased prices have helped lift confidence generally.
However, again we would stress that most of the fortunes of the UK are outwith the control of politicians here – the positive GDP figures are in large part due to the recovery among our main European trading partners. Slow growth in previous years has flattered the recent GDP numbers, rising faster than in many of our competitor nations but only because we are coming off a very low base.
So while we are happy to see signs of a recovery in the UK, it's no time for complacency. There's still plenty of spare capacity within the economy, with per-capita output still lagging behind levels seen before the financial crisis. And, the strength of the pound continues to inhibit our ability to export more and thereby improve our current account deficit.
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