Two months on from the General Election result, the Chancellor of the Exchequer today delivered his second Budget of 2015.
George Osborne will have known, as he stood up to address the Commons, that there was plenty riding on what came out of the famous red box.
This was the first Conservative Budget for almost 20 years and with the Conservatives now commanding an overall majority, Mr Osborne had far greater freedom to pursue policies which had previously been blocked by the Liberal Democrats.
In his opening statement, the Chancellor told MPs: “This is a Budget that puts security first, and recognises the hard-working British people.
“[It] sets out a plan for Britain for the next five years to keep moving us from a low wage, high tax, high welfare economy; to the higher wage, lower tax, lower welfare country we intend to create.”
The Chancellor set out his plans to eliminate the deficit – although the pace of the reduction is set to be far slower than some expected. The first Budget surplus, forecast to be around £10billion, will not arrive until 2020.
Nonetheless, another round of departmental budget cuts will be required, with further details on these savings set to be announced in the autumn.
Of the £17billion savings confirmed today, Mr Osborne said that £12billion would come from welfare cuts and £5billion from a further crackdown on tax evasion/avoidance.
Previously announced cuts in personal taxation were confirmed, while the Chancellor moved to position the Conservatives as the party of working people with the announcement of a compulsory Living Wage.
In a boost for business, further cuts were confirmed in corporation tax – which is set to be reduced to 19 per cent in 2017 and 18 per cent in 2020. The Chancellor is optimistic this will increase employment.
There will, however, also be significant changes to dividend taxation from April next year, which will impact many owner-managed businesses, and the effective tax rates on extracting profits.
One of the biggest surprises of the Budget was the introduction of a National Living Wage. This will apply to over-25s and will start at £7.20 next April, rising to £9 by 2020. Mr Osborne said that 2.5million people would see a pay rise as a result of the changes.
There was less good news for public sector workers, with pay awards set to be capped at one per cent a year for the next four years.
It was announced that the annual investment allowance – which it was feared would fall to £25,000 – will in actual fact rise to a permanent level of £200,000 a year from 1 January 2016. Mr Osborne said that this would be a big help for small and medium-sized businesses.
The Chancellor also spoke about the importance of apprenticeships and said that while some firms were doing an excellent job training employees, others were falling short of what was expected. A new apprenticeship levy will be imposed on all large firms, but Mr Osborne promised that those who take apprentices on will get far more back in terms of funding than they put in.
As was rumoured earlier this week, Mr Osborne confirmed that local councils and elected mayors would be handed new powers to set trading hours on Sundays. This policy, which will be put out to consultation, has attracted some criticism, but the Chancellor argued that local people should have the right to decide if the shops open for longer.
Drivers will be pleased to hear that there will be no change to the fuel duty plans announced in the Chancellor’s previous Budget four months ago. Fuel duty will remain frozen until the end of the year.
There will, however, be a new Vehicle Excise Duty (VED) tax for new cars. The levy will apply in three bands (zero emission, standard and premium) and is set to be introduced in 2017. Mr Osborne said the change was designed to make the car tax system considerably fairer, arguing that the current arrangements penalise those who can’t afford new cars.
In a move that will please many traditional Conservative voters, Mr Osborne said that the Inheritance Tax (IHT) threshold would be increased. This will allow £1million to be passed on tax-free and “end the levy on family homes.”
Elsewhere, mortgage interest tax relief is to be limited on buy-to-let, which Mr Osborne hopes will “level the playing field” in the property market.
The Chancellor said the Government would also press ahead with election pledges to increase the tax-free personal allowance to £11,000 from next year. While the threshold for the higher rate of income tax is also set to increase to £43,000.
However, Mr Osborne resisted calls from many in his own party to reduce the top rate of income tax.
The Chancellor spoke of the importance of increasing savings. He told the Commons that he would consult on creating ISA-style pensions, where people would lose the tax relief when they pay in, but would be able to withdraw their money tax-free.
Likely to prove less popular are plans to reduce the lifetime allowance for pension contributions to £1million (down from £1.25million) from April 2016. The annual allowance for pension inputs will also be reduced for those earning more than £150,000 – tapering away to £10,000, down from £40,000.
There was bad news for those who rely on tax credits, which Mr Osborne said were subsidising employment in a way that had never been intended. Working-age benefits will be frozen for four years, although statutory benefits such as maternity leave will not be affected by this. In additional child tax credits will only support the first two children from April 2017.
Other radical changes to the welfare system will see the benefits cap reduced to £20,000 (or £23,000 in London) and no automatic entitlement to housing benefit for those aged 18-21.
In total, the shake-up of the welfare system will save £12billion by 2019-20.
Trying to counter fears about the perilous state of the health service’s finances, Mr Osborne told the Commons that “our priority is the NHS.” Although he reiterated previous comments that a strong economy was essential to support services.
As the Conservatives had promised before the election, extra funds will be pumped into the health service to help meet the needs of a rapidly ageing population. The Chancellor confirmed that it would receive £8billion on top of the extra £2billion provided earlier this year. Or £10billion a year more by 2020.
Mr Osborne argued that the system for student maintenance grants was “unsustainable” and revealed that it would be scrapped from 2016-17. It will be replaced by a series of loans, which people will start to pay once they are earning more than £21,000 a year.
The Chancellor said that fears that tuition fees would deter those from poorer families from going to university had proven unfounded and that the charges would continue to rise in line with inflation.
Plans were announced to plough extra funds into tackling tax evasion/avoidance. An extra £750million will be set aside for HMRC to claw back money and serial offenders will be named and shamed.
Far tougher rules for non-doms were also confirmed. Mr Osborne has refused to scrap the non-domicile status outright, as Labour had pledged before the election. But the new regime will mean that from 2017, non-doms who’ve spent 15 of the last 20 years in the UK will pay the same tax as everyone else. The new arrangements are expected to raise £1.5billion for the Treasury.
Mr Osborne said that the Budget would pave the way for the Government to finish the job of eliminating the deficit. He argued that the British economy was fundamentally stronger than five years ago, but the crisis in Greece showed how dangerous it would be to become complacent about the nation’s improving finances.
With the Conservatives now holding an overall majority, the Chancellor had the chance to introduce long-awaited changes to Inheritance Tax (IHT) and further cuts in Corporation Tax. Elsewhere adjustments to income tax thresholds are expected to benefit around 29 million people.
Critics will argue that the dramatic changes to tax credits will hit many working families, although Mr Osborne tried to counter this with the headline-grabbing announcement of a National Living Wage.
“One purpose, one policy, one nation,” he concluded.
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