Budget 2015: Economic Security for the UK’s Progress?

Delivering the first Conservative Budget since 1997, Chancellor of the Exchequer George Osborne declared it to be a ‘budget for working people’ that ‘put economic security first’.

To meet the Government’s target of wiping out the deficit and achieving a surplus by 2019/20, the Chancellor confirmed that his fiscal plan will require a further £37 billion of savings over the course of the current Parliament. The latest Budget contains £17 billion of measures, with plans for a further £20 billion to be set out in the autumn, following the Spending Review.

In this blog, Idox’s Policy team outlines the key announcements in the Budget across the Voluntary, Community and Social Enterprise (VCSE), public and private sectors, together with reactions from stakeholders.

Voluntary, Community and Social Enterprise

The Chancellor confirmed that £70 million of banking fines over the next five years will be committed to support military charities and other good causes, including:

  • £50 million for the Cadet Expansion Programme (CEP) to increase the number of Cadet Units in state schools to 500 by 2020.
  • £5 million for the Royal Commonwealth Ex-Services League to help ex-Service men and women.
  • £2 million for the Children’s Air Ambulance to increase the service to two helicopters by the end of 2016, enabling the free-of-charge service to be extended.

The Government will also raise the Employment Allowance by £1,000 to £3,000 from April 2016, which it claims will support charities to create new jobs. In principle, charities will now be able to pay four employees full time before needing to pay National Insurance Contributions. However, the introduction of the National Living Wage for workers aged 25 and over of £7.20 per hour from April 2016, rising to £9 per hour by 2020, raises questions about the sector’s ability to achieve such growth.

Whilst the introduction of the National Living Wage has been broadly welcomed, sector leaders have warned that Government contracts do not allow VCSE groups to pay more than the current minimum wage. Caron Bradshaw, chief executive of the Charity Finance Group, commented:

‘The National Living Wage is to be welcomed but it begs the question, will Government increase its payments to those providing public services? If not then this could seriously squeeze the budgets of those providing services to the most vulnerable in our society. It’s a shame that there was nothing in the Budget to address irrecoverable VAT or gift aid reform. We’re disappointed that Government didn’t take the opportunity to start some of these incredibly important and necessary conversations.’

Of particular concern to VCSE leaders will be the lack of announcements concerning reform of Gift Aid, tax relief or more sustainable funding, all of which the sector has lobbied for in recent years. However, the Treasury has confirmed that work in developing these areas is likely to continue as planned under the previous Coalition Government.

The VCSE sector is likely to be most affected by the announced £12 billion in welfare cuts, which will impact the groups that its constituent organisations work most closely with. Most working-age benefits will be frozen for four years from April 2016, as will Local Housing Allowance (housing benefit for people who rent from a private landlord). The unemployed between the ages of 18 and 21 will also no longer be automatically entitled to claim housing benefit. Tax credits will be restricted to the lowest-income families, with the income threshold reduced from £6,420 to £3,850. Child tax credits and Universal Credit will also be limited to the first two children from April 2017. Employment and Support Allowance will further be cut by £30 a week for people seeking work, equalising it with Jobseekers’ Allowance.

NCVO’s Director of Public Policy, Karl Wilding said:

‘This was a low key event for charities in terms of reliefs or taxes about charity. That is probably not a bad thing.

‘For many organisations the devil will be in the detail of the welfare cuts and allowances.’

Public Sector

The Chancellor used the Summer Budget to announce four more years of public sector pay restraint. With public sector pay having been frozen for two years in 2010, and annual rises since 2012 capped at 1%, George Osborne set out how public sector pay rises would be set at 1% for the next four years. He called this a ‘simple trade-off between pay and jobs in many public services’.

The Budget document also hints at more changes to come on pay and terms, stating that the Government will use the Spending Review to ‘examine pay reforms and modernise the terms and conditions of public sector workers’.

The Chancellor has been heavily criticised over the extension to the pay cap, with concerns about staff morale and the exclusion of public sector workers from the economic recovery being raised by trade unions representing public servants.

Other announcements affecting local government related to a reduction in rents in the social housing sector by 1% a year for four years from 2016. Local authorities and housing associations will have to make efficiency savings to fund the rent reductions.

Moving on to health, George Osborne stated that the NHS was ‘truly safe in Conservative hands’. The Government will back the NHS Five Year Forward View and increase NHS funding in England by £10 billion per year, above inflation, by 2020-21.

Devolution was high on the Chancellor’s agenda. Further devolution for Greater Manchester will see fire services, planning and children’s services transferred to local control. George Osborne also announced that the Government is working towards similar devolution deals with the Sheffield City Region, Liverpool City Region, and Leeds, West Yorkshire and partner authorities. In addition, Osborne outlined current discussions with Cornwall, which could be the first county council to take control of devolved health and social care budgets.

The progress on devolution deals across England was welcomed by local government, although some would have liked the Chancellor to go even further with more decentralisation and devolution to communities and local councils. For now, local Government is looking to the Spending Review for further progress on this matter and more news on local authority funding.

Little was learned from the Summer Budget about the funding prospects for UK science over the next few years, with eyes now set on the Spending Review for more detail on this and other key announcements such as proposals for further Catapult Centres and the role of science and technology in regional economic development through science and innovation audits. The Budget document mentioned that funding streams such as the Research Partnership Investment Fund will be used to further promote local and regional collaborations between universities and other organisations active in research. The Chancellor also stated that the Government would respond to the Dowling review of business-university research collaborations by the Spending Review.

Highlights from the Chancellor’s Budget for education and skills included:

  • The introduction of a Youth Obligation for those aged 18-21 on Universal Credit to ‘earn or learn’. From April 2017, young people will take part in an ‘intensive regime’ of support that will begin from the first day of their benefit claim. Following six months of help, they will be expected to apply for an apprenticeship or traineeship, gain work-based skills, or go on a mandatory work placement, otherwise they will lose their benefits.
  • From 2016/17, student maintenance grants will be replaced with loans of up to a maximum of £8,200 for students in England. Loans will be payable on incomes above £21,000.
  • The Government will consult on freezing the student loan repayment threshold for the next five years and review the discount rate applied to student loans.
  • From 2017/18, those higher education institutions offering high teaching quality will be able to increase their tuition fees in line with inflation. A consultation will be launched on the mechanisms to do this.

Deep concern has been expressed about the scrapping of student maintenance grants as the reform might act as a deterrent to people from lower-income families entering higher education. Paul Blomfield MP, chair of the All-Party Parliamentary Group on Students described the move as ‘the last remnant of fairness in the student support system.’ He argued, ‘By cutting these grants, the government is deliberately choosing to attack students from low-income families, while other parts of the Budget give tax breaks to higher-income households and boost the inheritance of those from million pound homes.’

Chris Cook, Newsnight Policy Editor, commented that the Budget Statement marked, ‘an important intellectual shift in the way that we run our higher education system, as it will introduce a rather radical idea: different universities deserve very different treatment.’

Business

A key aim prevalent throughout the Budget was to shift away from what George Osborne called a ‘low wage, high tax, high welfare economy’ to the ‘higher wage, lower tax, lower welfare country we intend to create’. Many of the measures announced in the Budget were, therefore, designed to ease the overall tax burden placed on businesses in order to encourage them to pay higher wages to their staff and invest in their development so that the Government has the capacity to spend less on welfare. The Chancellor has since described this shift as a ‘new contract’ for the country.

Key Summer Budget 2015 announcements affecting business included the following:

  • The main rate of Corporation tax will be cut from its current rate of 20% to 19% in 2017 and 18% in 2020, which is expected to benefit over a million businesses.
  • The Annual Investment Allowance, which was previously raised on a temporary basis, will be permanently set at £200,000 from January 2016, allowing businesses to deduct certain items from their pre-tax profits in the same financial year in which they were bought.
  • The Government will introduce three million new apprenticeship schemes by 2020. This will be funded by a levy on large businesses, while employers who commit to training and developing their apprentices will be able to get back more than they put in.
  • The dividend tax credit will be replaced by a £5,000 tax-free dividend allowance on dividend income.
  • An additional £7.2 billion is expected to be raised from new measures designed to clamp down on tax avoidance. HMRC will receive an additional £750 million in order to triple the number of criminal investigations it can launch into fraudulent activities and will be able to identify more businesses that are not paying or declaring tax.
  • A consultation will be launched into plans that will allow local councils and city mayors to have the power to extend Sunday trading hours for larger businesses.
  • The Climate Change Levy exemption for renewable electricity will be removed.

Reaction to the Budget from the business world was fairly mixed, with many welcoming moves to cut corporation tax and fix the Annual Investment Allowance, but reserving full judgement on plans to boost productivity and improve the quality of staff training until further details of the measures are made public. However, concern was expressed over the impact of the new higher National Living Wage, particularly for small businesses with a high number of employees, which would feel the least benefit from the cut to corporation tax.

National Chairman of the Federation of Small Businesses, John Allan, said:

‘We agree with the focus on productivity but need to see the details to raise skills through the apprenticeship levy on large firms. Planning reforms are also critical to raising productivity and again we look forward to seeing the proposals on Friday.

‘However, even though offset by a welcome increase in the employment allowance, some will find the new National Living Wage challenging. Changes to the treatment of dividends will also affect many of our members.’

Nevertheless, many positives were taken from the proposals, and the confidence that big business expressed in the Budget was reflected by a 0.91% rise in the FTSE 100 index at close to 6490.70. This cautiously optimistic reaction from the business community was encapsulated by CBI Director-General, John Cridland, who described the statement as a ‘double-edged Budget for business’, praising the policies designed to lower the tax burden on businesses but warning that the minimum wage increase represented a ‘big gamble’.

Conclusion

Summer Budget 2015 introduced the most radical financial measures in a generation. Cutting across all sectors, these reforms will have a profound effect on the future of how public services will be delivered, businesses will grow, and the most vulnerable in society will continue to be supported.

The Chancellor is also proposing a ‘fiscal charter’ requiring future governments to run a surplus in normal years. In doing so, the Government is seeking to establish its current economic policy as the basis for all future administrations. Whilst Mr Osborne insists that maintaining a surplus is essential to Britain’s long term economic security, opponents claim that the Chancellor is putting politics ahead of the welfare of the nation.

Attention is now firmly focused on the upcoming Spending Review, where the Government will set out how the £37 billion in savings will be implemented across departments. POLICYfinder – Idox’s essential online tool keeping organisations up to date with the policy changes affecting their work – will report further on the content and implications of the Spending Review in the autumn.

For further information, click here or contact grants.marketing@idoxgroup.com

By the Idox Policy Team

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