What Budget 2016 means for the UK economy

Matthew Partridge looks at how the measures George Osborne announced in the Budget will affect Britain’s economy.


Osborne announced infrastructure projects, including HS3 and London's Crossrail 2

In the Autumn Statement last November, George Osborne benefited from an upward revision to predicted economic growth. In turn this boosted expected revenue, giving him enough room to both scrap planned cuts to tax credits and reduce the amount of public spending cuts.

However, this process seems to have gone into reverse with the Office for Budgetary Responsibility (OBR) reducing this year's projected growth by 0.4% to 2%. Growth projections for 2017 and 2018 have also been slightly reduced. This is because of fears about the effect of a Chinese slowdown on the global economy.

So, how will this affect Osborne's fiscal targets?

Reduced growth projections will hit revenue, and cause the debt to GDP ratio to rise this year, which means that the government will miss its target of reducing the share of national debt to GDP.

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However, reduced inflation expectations means that it will take longer for interest rates to return to more normal levels, bringing down interest payments on the national debt. While the cumulative level of debt will be £40bn higher, Osborne still claims that the government is on track for a fiscal surplus (where the government takes in more money than it spends) by 2019-2020.

Are these budget projections realistic?

Vicky Redwood of Capital Economics notes that Osborne's surplus projections imply that there will have to be large spending cuts and tax increases in the last years of this government. Since this would be politically difficult, especially close to an election where he might be Conservative Party leader, she thinks that his backloading strategy suggests that he is "hoping that by the time many of them arrive, he won't actually need to implement them".

However, while she thinks that the OBR is being too pessimistic, "the big picture remains that austerity is set to intensify over the next couple of years, keeping a check on the economic recovery".

What about tax evasion?

The government has pledged to continue its clampdown against tax evasion, especially by multinational companies. It is particularly targeting online firms who try to avoid paying UK VAT by carrying out sales through offshore subsidiaries. It is also limiting the amount of interest that can be set against profits, again trying to stop firms from taking on debt in one country and then offsetting that against UK tax.

While the latter measure may seem radical, other OECD countries have taken similar measures to attack tax evasion. In return the government will lower the rate of corporation tax to 17% by 2020 (instead of 18% as previously planned).

Were there any other major announcements?

As expected, Osborne confirmed that the government will go ahead with HS3 and announced a handful of motorway projects, mainly in the north of England. He also announced an increase in flood defence spending paid for by a levy on insurance companies.

Oil taxes will be reduced to protect the North Sea oil industry, although fuel duty will remain frozen. A sugar tax of £520m will be imposed to combat obesity. The chancellor is also pressing on with his plans to devolve more powers (mainly over the prison service) to local authorities in Manchester.

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