If anybody thought George Osborne was likely to be on the back foot as he faced the House of Commons today for his fifth spring Budget speech, they were to be sadly mistaken.
Yes, he needed to be careful of letting too many giveaways spoilt the purity of his plans to reduce the deficit and eventually bring us back to surplus. And yes, although he had a lot of good news to impart about the economic recovery, we always knew he wasn’t going to get suckered into making brash statements that would come back to haunt him.
What he did instead was to deliver a speech that sounded like he was being paid by the word. Few of us can ever recall hearing such a sustained, quick-fire delivery of measures – some of them small, many of them subject to an awful lot of clarification, but a fair number that were completely ground-breaking in their implications. And all the two Eds could do was to mutter darkly about Tory boy Old Etonians looking out for each other, and shake their rhetorical fists at him. It’s a tough life, having to answer the Budget statement.
We already knew quite a lot about this speech, because most of it was laid out on the Chancellor’s autumn statement last December. We knew, for instance, that he was planning to raise the higher rate income tax threshold to £41,865, rising by 1% thereafter. We knew that the basic rate threshold would rise to £10,000 in 2014-15, plus another £500 which would probably come along, and which was duly confirmed. We also knew that the probable £1.5bn cost to the Treasury would be covered by public sector cuts, affecting most departments that weren’t in the medical or educational arena.
We knew that he was likely to extend the allowances and other concessions to small businesses, particularly the £250,000 annual investment allowance – though it’s doubtful whether the two Eds expected the Chancellor to double it to £500,000, with effect from April until the end of 2015. And we knew that the main corporation tax rate was being cut from 23% to 21% and that it will go down again to 20% in April next year.
And we also knew that the lifetime pension contribution was due to come down from £1.5 mn to £1.25 mn – a problem for higher earners, and surely a boost for EIS and VCT providers who were all set to offer alternatives for those wanting to secure a bigger tax-efficient stash in their old age.
But the first surprises started in the economic performance figures.
Job creation three times faster than any other government on record. A 24% fall in the claimant count in one year. The OBR forecasting unemployment down from 8% in 2008 to 5%. A record number in work.
The IMF says we are achieving the largest structural reduction in the deficit of any major country, the Chancellor said. Down to just 6.6% of GDP this year, then 5.5%, 4.2%, 2.8%, and down to no deficit at all in 2018/19.
Or, in real numbers, borrowing would be down to just £108 billion this year (£24 bn less than forecast), then to to £95bn, £75bn, $44bn, £17bn, and finally hitting a £5 billion surplus in 18/19. The government had shaved £42 billion off the annual servicing cost – if “shaving” is the right word –
More Predictable Measures
We knew that most welfare payment increases would be subject to the same 1% cap as the public sector. We pretty much expected him to crow about house-building incentives, and to promise 200,000 new homes, some of which would be built under self-build projects. Although a few of us would have expected a bit more in the way of public infrastructure expansion than the £200 million for road surface improvements, the £124 for much-needed flood defences and some incentives for encouraging exports from regional ports and airports. Plus, of course, a £270 million guarantee for the Mersey Gateway Bridge, and an enterprise zone in Northern Ireland
But there was something a little unsettling about the quick-fire rate at which Mr Osborne just kept them coming. Far too fast for most press commentators, who struggled to keep the Twitter blogs even remotely up to the minute. And yes, if George had been trying to slip something past us, there was every chance that this would have been the moment to do it.
But the fact is that he didn’t simply stop while we were all gasping to catch our breath. No, in a few short minutes he had not just met the hopes and expectations of ISA and pension campaigners – he had pretty much blown them away. It was a tour de force.
The change in the savings regime was as drastic as it was unexpected. The annual ISA allowance is to be raised to £15,000 for both cash and stocks and shares – a radical step in itself. But what was more, savers are to be able to shuffle and transfer their holdings much more easily within this merged set-up. And the contribution limit for Junior ISAs goes up to £4,000 a year.
Pause for effect. But the Chancellor was just getting into his stride. Promising a better deal for older savers who were tired of the current low interest rate environment, he promised to issue £10 billion of new pensioner bonds this autumn, which he said would probably pay 2.8% p.a. over one year or 4% p.a. over three years. A maximum of £10,000 can be saved in each bond.
For the very smallest savers, the abolition of the 10p rate on savings, and its reduction to zero, will have been welcome. But as a blatant vote-getter it was probably on a par with reducing the duty on bingo from 20% to 10%. Not many of us will notice it.
The Pensions Bombshell
For some of us, what followed was almost a bit too radical to take in at one go. Did George really say that it was time the elderly were “trusted with their own finances”? And that maybe, just maybe, there was something better for many investors than the hallowed annuity system?
Did he really say: “We will legislate to allow pensioners to decide – no-one will have to buy an annuity.”?
Yes, actually he did. And he followed through with the news that the flexible drawdown threshold for income was being reduced from £20K to £12K, with effect from 27th March. And a promise that all pensioners are to be entitled to free face to face interviews when choosing retirement income options. Now, will that mean state-funded business for IFAs, or will it mean that the Financial Conduct Authority will be going into business in competition with us? We don’t know yet.
And so to the concluding announcement that the punitive 55% tax levied on anything that you take from your pension pot beyond the initial 25% is to be scrapped. Or rather, that it will be reduced to your normal marginal tax rate. Yes, Mr Osborne promised that too. And it’s rather hard to see that as anything other than him saying: “Oh all right, if you’ve got a better idea than an annuity, you can go ahead and do it.” An awful lot of us will have better ideas for our clients, I suspect.
The Devil is In the Details
Don’t get me wrong here. This is a massive upheaval of the pensions system, and it’s coming at us right out of the blue. We won’t have got a proper understanding of all this until we’ve been through the thousands of pages of legal bumf that deal with the fine detail.
And we won’t have reviewed it properly until we’ve thought about the effect it will probably have on the insurance companies who depend on annuities business? Will it result in a wholesale exit from the annuities business? Or will most pensioners shrug their shoulders and opt for an annuity anyway?
This one won’t be over until the ink has dried on the Queen’s signature. But what a way to welcome the spring. Now excuse me, I really must go and check the small print.