Last Wednesday, George Osborne stood up in the House of Commons and delivered the first Conservative budget since 1996. It contained a lot of pre-trailed measures, a few surprises and a couple of masterstrokes. You can view the full details on gov.uk, and I have extracted the main measures and provided some commentary below.
Cuts to welfare
Cuts to the welfare budget had already been promised, and by deciding to protect child benefit and the most important but expensive welfare recipients of all (pensioners), Osborne had to make deep cuts to other areas. Working-age people – especially the young – will suffer the most, with many benefits frozen, a reduction in the housing benefit cap and market rents imposed for social housing tenants on ‘higher’ incomes.
Tinkering with dividends
The tax credit granted on dividends will be abolished and replaced by a tax-free allowance of £5,000 and an increase in the tax paid on dividends. I doubt this will affect many people, as by my reckoning you’d need over £100,000 in shares (outside of tax wrappers such as pensions and ISAs) in order to pay more tax under this system. If you do have that much invested, you can probably afford to pay a bit more towards the provision of services.
Increased defence spending
Apparently NATO says that we should be spending 2% of national income on defence. As we’re currently below that target, despite an expensive Trident replacement due sometime soon, the Ministry of Defence is going to get a raise in real terms of 0.5% each year until 2020. This seems like a huge waste of money that could be better spend elsewhere, especially considering that the majority of wars that our armed forces are involved in required old-fashioned ‘boots on the ground’ rather than fancy electronic warships.
Raising the inheritance tax threshold
This has been something the Conservatives have wanted to do for years, and last week Osborne finally delivered the goods, albeit in a roundabout way. The tax-free allowance will remain at £325,000, but there will be a new ‘family home allowance’ which effectively means a house worth up to £1m without paying tax if certain conditions are met.1
The problem with inheritance tax is that many people seem to consider it as the government stealing their hard-earned wealth, despite the fact that the vast majority of estates do not pay it.2 So this move will not benefit anyone other than those who are either vastly wealthy already or who happened to buy a house in London in the sixties which is now worth a small fortune. If anything, the Chancellor should be cranking up receipts from this source, either by reducing or freezing the nil-rate band or removing some of the exemptions.
Yet more cuts to pension tax relief
In nearly every budget so far, Osborne has cut pension tax relief, and this one was no exception.
Existing pensioners have no need to fear though, as Osborne has promised to protect the ‘triple lock’ on the state pension and protect the Winter Fuel Allowance and the free TV licence.
Overall, this was an overtly political budget, far more so than usual. Osborne’s announcement of a National Living Wage seems to have caught people off-guard, and the fact that both Labour and the Liberal Democrats lack a permanent leader or credible treasury spokesperson meant that opposition in the Commons was subdued.