How the Budget turns the Conservative’s pledges into actions

8th July 2015

David Page, Senior Economist at AXA Investment Managers (AXA IM) says the Chancellor has used this opportunity to turn what were the Conservatives’ pre-election pledges into actions below.

George Osborne delivered his first Budget as Chancellor of a fully Conservative government today. This statement was important to marry pre-election pledges of welfare reform and spending commitments with his broader ambition of repairing the public finances.

It was also an important first clear opportunity to deliver Conservative values. A range of measures delivered in over an hour-long speech broadly accomplished these aims.

The fiscal stance is set to be tightened more consistently across the whole of this parliament. Although the details of departmental spending cuts will be published with the upcoming spending review, the ‘envelope’ of spending cuts has been significantly reduced. Adjustments in welfare and anti-avoidance measures matched pre-election pledges.

Given the scope of this Budget, a range of measures was introduced today (covered more extensively in the annex below). These included changes to personal income tax allowance and inheritance tax, with pension tax relief reduced for high-earners –measures broadly trailed in the press. Welfare adjustments were far-reaching, but the bulk of the heavy lifting was achieved by a four-year freeze in out-of-work benefits and a lowering of the point at which in work benefits were reduced and the pace of that reduction.

The Chancellor was also able to set his own agenda. The surprise finale was the introduction of a National Living Wage, which will take the minimum wage to £7.20 per hour next year and to £9 per hour by 2020 – estimated at 60% of the UK’s median wage. Osborne also spent time detailing plans for devolution within England. Changes to business taxes were broadly neutral in this parliament with further corporation rate tax cuts and an increased investment allowance offset by an additional ‘surcharge’ on banks ahead of a reduction in the bank levy and a change in the timing of tax liabilities for larger companies.

These measures were projected to deliver the Chancellor’s fiscal objectives of reaching a cyclically adjusted current budget surplus within three years, achieving an outright surplus by the end of this parliament and seeing debt fall as a proportion of GDP.

The Office of Budget Responsibility’s (OBR) economic projections were broadly unchanged, with growth now forecast to deliver 2.4% for each year from now until 2020 (save 2.3% in 2016). Our own forecast is for growth to exceed this pace in 2015 and 2016. However, we see downside risks to the growth projections towards the end of the forecast period. The OBR’s projected seven-year growth stretch begins to suggest a prolonged economic cycle, a case supported by ongoing monetary policy stimulus. However, a shortfall in growth may yet threaten the Chancellor’s ability to deliver a public sector surplus in this parliament.

Table 1: Medium-term outlook for public finances










March 2015
PSNB (£bn)














Cyc -adj current budget (£bn)







Cyc-adj current budget (% GDP)







PSND (£bn)














Chg in fiscal stance (% GDP)







July 2015
















Cyc -adj current budget








Cyc-adj current budget (% GDP)
























Chg in fiscal stance (% GDP)








Source: OBR, AXA-IM Research

Detailed Overview

Public finances. The projections for the public finances met the Chancellor’s fiscal objectives. The cyclically-adjusted current balance is forecast to be in surplus in 2017-18 (within the three years prescribed by the Charter for Budget Responsibility); public debt is projected to fall as a proportion of GDP in each year; and the public sector is forecast to run a surplus in the final year of this parliament. This is projected to continue thereafter and today Chancellor Osborne outlined plans to require a surplus to be run in “normal economic times” – defined as annual growth averaging more than 1% over the previous four quarters. Table 1 above provides the headline fiscal aggregates.

Measures. The Chancellor had much to deliver to marry pre-election pledges with Budget promises. Details of departmental spending cuts were deferred to the summer’s spending review. That said, projected total spending now envisages a broadly stable outlook in real terms, compared with projected real cuts of 0.6% this year, 1.5% next and 1.1% the following year as outlined in March. This in part reflects a significant easing in the envelope for real departmental spending cuts. In March, these were projected as falling by 1.7% in this fiscal year, 6% in 2016-17 and 5% in 2017-18. The outlook now sees 2%, 0% and 2.3% respectively.

This Budget contained detailed proposals to enact Osborne’s plans to cut £12bn of welfare spending payments and £5bn of anti-austerity payments.

This Budget contained detailed proposals to enact Osborne’s plans to cut £12bn of welfare spending payments and £5bn of anti-austerity payments.

Personal tax allowances. The Chancellor began to meet his commitment to raise basic and upper rate limits. The income tax personal allowance was raised to £11k from £10.5k (at the cost of just over £1bn/annum). The higher rate limit was raised more modestly to £43k from £42.4k. The Chancellor also announced changes to inheritance tax, to deliver a “£1m couples allowance”. Some of the cost of this was recouped from adjustments to pension tax relief for gross incomes in excess of £150k.

Businesses benefitted from a further reduction in corporation tax to 19% from 2017-18 and 18% from 2020-21 and a rise in the annual investment allowance (to £200k). This was broadly offset by bringing forward tax payments for large groups and a new surcharge on banks (ultimately to replace the bank levy).

Welfare. A few key announcements delivered the majority of the projected savings in the welfare budget: working-age benefits were frozen for 4-years from 2016-17, projected to save £4bn in 2019-20 alone; the taper point for working credits was reduced and the taper rate increased, saving towards £3-4bn/annum from 2015-16. The Chancellor also limited some benefits to two children, reduced social sector rents in households and lowered the overall benefit cap to £20k (£23k in London).

The Chancellor expects to raise significant income from an increase in Insurance Premium Tax (to 9.5% from 6%); introduced a new dividends tax (targeted at incorporated single employee firms); and abolished the permanent status of non-domiciled residents.

At the same time the Chancellor delivered on his promise to introduce 30-hours free childcare for working parents of 3 and 4 year olds. He also introduced a National Living Wage, which will increase the minimum wage to £7.20/hr next year, and allow the Low Pay Commission to raise this annually towards £9/hr by the end of the parliament (estimated 60% of the median wage as advised by the Resolution Foundation).

Economic outlook. The OBR saw little change to its GDP outlook with GDP growth forecast at 2.4% per annum in every year from 2015 to 2020 (save 2.3% in 2016). The economic outlook will be supported by a reduced tightening in the fiscal stance in 2016-17 to 1.3% of GDP (from 1.8% in May). However, the fiscal stance was tightened by more in this financial year to 0.9% (from 0.5%) and the fiscal stance is set to remain negative through and including 2019-20.

Underpinning assumptions. We highlight three assumptions that we take some issue with. We see risks to these assumptions skewed to the downside.

Projections of steady, uninterrupted growth over the coming five years suggests an economy repeating the business cycles of 1990s/2000s and the late 1980s. With the MPC still providing ‘emergency’ levels of monetary policy accommodation, there is a case for an extended business cycle. However, Bank of England Chief Economist Haldane recently presented a paper which  showed that based on a long-run history, the UK should expect a recession with over 50% probability over a five year period. A shortfall in growth would make the chances of meeting a surplus by the end of the parliament unlikely.

The OBR maintained its upgraded outlook for the economy’s potential growth (upgraded in March to accommodate an increased migration assumption). The composition of this firmer trend growth was tweaked this time with a modest upgrade to the productivity assumption. With little sign of a productivity recovery, there appears downside risks to this outlook.

The finances also benefited from the OBR forecast that gilt yields would not rise above 3% over the coming parliament. This has helped keep the projected debt interest schedule relatively subdued. A sharper rise in gilt yields would add to the debt interest bill over time.

Gilt remit. Alongside the Budget, the DMO revised its gilt issuance schedule for 2015-16. A significant £14bn downward revision to the CGNCR profile resulted from an increased expectation for privatisation receipts. These included upward revisions for the student loan book, Lloyds (additional £4bn this year), RBS (£2bn) and Royal Mail (£1.5bn). The change in CGNCR forecast also reflected a more technical adjustment to the OBR forecast methodology.

The DMO absorbed the vast majority of this swing by reducing its planned T-bill issuance (by £10.5bn), now planning to reduce the T-bill stock by £3.5bn compared to a previous planned increase of £7.0bn. The remaining £3.5bn was shaved off planned gilt issuance. Gilt sales are projected at £127.4bn (compared with £130.9bn in April). Planned short and medium gilt sales were reduced by £0.9bn and £0.8bn respectively, index-linked sales were reduced by £0.6bn and a further £1.3bn was removed from the “unallocated” portion. Only long gilt issuance plans were left basically untouched (just £0.1bn lower).

Projected cash borrowing for 2016-17 (£13bn) and 2017-18 (£4bn) was also revised lower in part on future privatisation expectations.

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