The Chancellor had a gloomy outlook on the years to come, as he unveiled the UK budget earlier today. Although the UK economy is strong, he says, the deteriorating global economic outlook requires the country to prepare for the worst in the years to come.
As analysts decipher the meaning of the Chancellor’s 8th Budget speech from social, economic and political viewpoints, let’s recap what we already know, and how the proposed changes will affect our personal finances
Budget cuts as Osborne aims to decrease the fiscal deficit
Chancellor Osborne has made no attempts to conceal his plans for budget cuts. On top of the agenda for the budget is imposing a further £3.5 billion of spending cuts by 2020 to allow him to meet his fiscal target of getting the nation’s finances into surplus by the next election. Debt is set to be £9bn lower in 2015-16 in cash terms. Spending as a share of GDP to fall to 36.9% by 2020 is one of the top priorities.
The Budget has been criticized for its cuts to disability benefits, which Natalie Bennet, leader of the Green Party says “could see 500,000 people lose up to £150 a week”. The government, however, says it will spend more in real terms on disability payments than any Labour administration, George Osborne has said. Delivering his Budget, he told MPs that the money would be “better targeted” at those who needed it most, and that the budget would rise by more than £1bn.
Read here for more about cuts to disability benefits.
Taxes and Savings – at the frontlines of the Budget
Rumours of plans to increase the Insurance Premium Tax have now been confirmed, as the chancellor announced a 0.5% increase. In his previous budget this levy on insurance policies (including car, home contents, pets and medical cover) was increased from 6 per cent to 9.5 per cent. This means that while fuel duty has been frozen, saving drivers £75 per year, motorists will be hit through the newly increased insurance tax, which amounts to 10% and not only adds to the cost of motor insurance but also breakdown cover and other forms of insurance – in particular a rise in healthcare insurance costs, home insurance, and pet insurance.
Drivers crossing the Severn Bridge will be pleased to know that cost of crossing will be halved in 2018, which should ease the financial burden of the increased insurance tax.
The threshold at which people pay 40% tax will rise from £42,385 to £45,000 in April 2017, together combined with an increase of the tax-free personal allowance to rise to £11,500 in April 2017 leads to a higher disposable income and greater financial stability for some households – economists warn that the raised tax thresholds does not benefit the poorest families at all
New incentives to save
Incentivizing people to save and budget was a key theme in Osborne’s speech. Millions of low-paid workers who put aside savings could receive a top-up of up to £1,200 over four years, the government has announced. Employees on in-work benefits who put aside £50 a month would get a bonus of 50% after two years – worth up to £600. That could then be continued for another two years with account holders receiving another £600. The government’s aim is that this will enable low-paid workers to better manage their money, and motivate them to use existing banking services while at the same time contributing money to the economy. This new scheme, called ‘Help to Save’ will come into effect in April 2018, after a consultation.
On savings, the ISA limit will be increased to £20,000 a year for all savers, and a new Lifetime ISA will be introduced for people under 40, with government putting in £1 for every £4 saved, i.e for every £4,000 each individual saves the government will give them a £1,000 bonus. Individuals can continue saving until they reach the age of 50. The Lifetime ISA is a tool to encourage the young to save for their future and makes savings easier to access for many, and promotes a savings habit. Lifetime ISA account holders will have access to all the funds, including the government top-up, tax-free to buy a first home of up to £450,000 or save for pension, meaning that it is essentially a choice for the under 40s of whether to save for a house or a pension. Yet, this also has a catch – while the funds can be used to buy a first home any time after opening the account, or can be withdrawn from age 60 to fund retirement, accessing the funds for other reasons forfeits the right to a bonus and imposes a 5% charge (The only exception is if you are terminally ill).
End to the Money Advice Service
The Money Advice Service, which has provided financial advice to consumers since 2010, is to be abolished. After investigations into the Service by the National Audit Office revealed that MAS was not always delivering value for money, and that public reach was limited, with few members of the public having even heard of it, the chancellor has decided to replace the Money Advice Service with a much smaller body with a focus on providing “frontline” services to those in financial difficulty. Critics have said that the predominantly web-focused Money Advice Service failed to help people who needed face-to-face assistance with budgeting, debt management and financial planning. This leaves thousands of service users at odds on where to get alternative free advice. Peter Pledger from the National Skills Academy for Financial Services, says its crucial that “people are made aware of all the support services that are available to help them.”
Support for the homeless
The Budget has also allocated £115m to help homeless people off the streets. This funding is expected to provide at least 2,000 places in ‘second-stage’ accommodation for rough sleepers leaving temporary accommodation or domestic abuse victims leaving refuges.
The Budget also includes a number of commitments to improving competition and fairness in the financial services sector:
- The government will shortly publish the first of two reports into the role that key trigger points can play in empowering consumers.
- Claims management regulation – The government will establish a tougher regulatory regime for claims management companies
- The government will legally require nine banks to offer basic bank accounts to help people access basic banking services.
- The government will continue to pursue more proportionate capital requirements for small banks and building societies in the EU
- ensure Bacs takes action to further improve the Current Account Switch Service.
- consult on introducing a Pensions Advice Allowance over summer 2016
- consult on amending the definition of regulated advice in the existing Regulated Activities Order to bring it in line with that of the Markets in Financial Instruments Directive – this would mean that regulated advice is based upon a personal recommendation
Responding to the Budget, key players in the Social and Public Sector have expressed their concerns on a lack of focus on the lower income and poor families. Julia Unwin, chief executive of the Joseph Rowntree Foundation says the Chancellor’s actions did little to address the risk poverty presents for the economy. “The extra support he offered – tax cuts and savings help for better-off workers and extra support for business – will bypass those in work but living in poverty”.
David Finch, Senior Economic Analyst at the Resolution Foundation notes that while everyone likes to pay lower taxes, the proposed income tax cuts will largely benefit higher income households, receiving over 80 per cent of the benefit. “That is hard to justify at a time of major fiscal pressure.”
The budget has also been criticized for a lack of digital inclusion and adult skills.
The Tinder Foundation’s Charlotte Murray notes the disappointment for the digital inclusion sector – there was no mention of digital skills or even adult skills in the Chancellor’s speech – which is crucial for our tech-heavy society, where digital illiteracy is a major barrier to employability and escape from the poverty threshold.