What the summer Budget means for the UK economy

George Osborne announced a lot of headline grabbing measures in his summer Budget. Matthew Partridge explains what they mean for the wider economy.


The big surprise in Osborne's summer Budget was the introduction of the 'National Living Wage'

George Osborne announced a lot of headline grabbing measures in his summerBudget. Here's what they mean for the wider economy.

So what's happened?

Today, George Osborne delivered his summer Budget. There were a large number of announcements that affect the wider economy. Growth forecasts are essentially unchanged from March, with a slight reduction in this year's growth being balanced by increases in later years. The £12bn in planned welfare spending cuts will go ahead, though some of them will be phased in over a slightly longer period. There will also be changes to taxation and the creation of a "living wage" (essentially a slightly increased national minimum wage for the over-25s).

How will this affect the deficit?

The Budget contains measures that will both increase and decrease revenue and spending relative to the March 2015 Budget. However, the decision to carry out the £12bn of welfare cuts (mainly to benefits and tax credits) over three years rather than two means that the deficit will not be closed until 2019/20. Despite the tax rises, further spending cuts of around £17bn will be needed.

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This means that the government still faces difficult decisions next year, especially if growth proves to be lower than expected or payments on the national debt are higher (because of interest rate increases).

What about the impact on property prices?

Osborne sent mixed signals on property.

Ending the non-dom' status of those who have been in the country for 15 years may reduce demand for prime London property (though most non-doms will still be able to retain their status). And the capping of tax relief on buy-to-let mortgages to the basic rate of taxation should take some heat out of that part of the market. But allowing couples who own property to pass up to £1m to their children tax-free (with some exceptions) will encourage pensioners to stay in their homes, reducing supply.

Sadly, these measures are unlikely to bring prices back down to a more reasonable level.

So, what is the new 'National Living Wage'?

The major surprise of the Budget was the decision to bring in a 'National Living Wage'. This is essentially a new national minimum wage rate for those who are 25 or over.

Starting in April, the rate will rise to £7.20 from the October rate of £6.70 a raise of around 10%. Over the next five years, the Low Pay Commission will be asked to ensure that it reaches 60% of median over-25 earnings by 2020, projected by the OBR to be £9.35, dependent on earnings growth.

It should also be noted that the unofficial 'living wage', used by many councils and employers, is significantly higher. Indeed, when set against the median full-time wage the national minimum wage will only rise from around 45% to 52%.In any case as many people have pointed out, including Larry Elliott of The Guardian because of the cuts to in-work benefits, most low-paid earners will still be significantly worse off.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri