Budget 2016: the Prospect panel

The experts give their views

March 16, 2016
Cans of Coca-Cola, which will be subject to a sugar tax from 2018. ©Nick Ansell/PA Wire/Press Association Images
Cans of Coca-Cola, which will be subject to a sugar tax from 2018. ©Nick Ansell/PA Wire/Press Association Images
Cans of Coca-Cola. Sugary drinks will be subject to a sugar tax from 2018. ©Nick Ansell/PA Wire/Press Association Images Global markets might be turbulent, but the UK is better placed to deal with nasty surprises than almost anyone. This was the argument made by George Osborne as he delivered his 2016 Budget. The Chancellor admitted that growth forecasts for the UK economy have been downgraded, and that he has missed his debt target for this year: debt has not fallen as a proportion of GDP. However, these shortcomings were framed in an international context. Osborne announced that, provided it stays in the European Union, the UK will grow faster than any comparable economy in the coming years. The Chancellor also announced that every state school is to become a self-governing academy by the end of this parliament, and that corporation tax is to fall from 20 per cent to 17 per cent by 2020. Several incentives to save were also announced, including a lifetime ISA for those under 40, to which the government will contribute £1 for every £4 put in.
Perhaps the most news-worthy announcement, though, was for a sugar tax on soft drinks. David Buck, Senior Fellow at the King's Fund, contributes on this as part of our expert panel below. Other contributors include Emma Maier, Editor of Inside Housing, and Andrew Haldenby, Director of the Reform think tank.

It may not help the homeless

Emma Maier, Editor, Inside Housing This Government's clear priority when it comes to housing is creating a nation of homeowners. The Chancellor's focus on "demand-side solutions" continued this Budget: the Lifetime ISA was a useful leg-up for under 40s already able to save, and there was reference to exploring "ways to extend homeownership" to social tenants who can’t afford to buy—despite the existence of the "Right to Buy" and "Help to Buy" schemes. But with rough sleeping rising, the chancellor was under pressure. The much-trailed council duty to prevent homelessness did not materialise in the budget: instead there was a £115m fund announced for that purpose. Investment is welcome, but whether it makes up for recent cuts is debatable. The end of social housebuilding and the Budget's attack on the fledgling build-to-rent sector will be a further barrier to housing homeless people. The Budget didn't provide a sustainable solution for future generations. It may, however, be enough to take rough sleeping out of the public gaze.

A mixed day for businesses

Daniel Mahoney, Head of Economic Research at the Centre for Policy Studies think tank

Some of the Budget’s measures will be welcomed by British businesses. The increase in business rate relief means that 600,000 businesses are now exempted from this tax, and the announcement that corporation tax will fall to 17 per cent by 2020 is a boost for British enterprise more broadly. However, the Budget avoided tackling some of the more major reforms needed. For example, there was little announced about tackling the UK’s burdensome tax code, which now has over 12 times as many words as the King James Bible. The Office for Tax Simplification recently announced a radical idea, calling for an alignment of income tax and national insurance—a measure proposed by the Centre for Policy Studies last month. It is very disappointing that this was not mentioned in the Budget—given that it is always best to pursue radical reform early in the electoral cycle.

What about the parents?

Lisa Freedman, Founder and Director of education consultants At the School Gates The Chancellor’s announcement that he intends to complete the task of “freeing” all of England’s primary and secondary schools from local authority control by 2020, turning them into academies, is worrying at best. The stated motive for the move has always been to give schools more power over school curriculum and organisation, but the way the model has evolved means most academies are, in fact, controlled by chains, which give Heads of individual schools less autonomy than they had under the local authority. Nor have these big education companies always done a marvellous job. There is limited evidence to support the Department for Education's claim that the growth in sponsored academies has transformed the performance of the most disadvantaged pupils. Other serious concerns surround accountability and finance. Ofsted has had to fight hard to gain limited power to judge academy standards, and the accounting process of the bigger chains is far from transparent, often revealing little about the flow of money between the governing trust and the schools. The move is also one which undoubtedly jars with the Chancellor’s stated intention to devolve power to the regions. Only parents, it seems, will have no say in the way their local schools are run.

Devolution's good—but don't move the goalposts

Alexandra Jones, Chief Executive of the Centre for Cities think tank The new deal to give the West of England greater control over planning, transport and other areas represents a welcome commitment from the Government to extending its devolution agenda, and will be particularly important to improving the UK’s poor productivity. But the Government also needs to holds up its end of the deal on devolution and resist the temptation to shift the goalposts, as local government prepares to take on more responsibilities. In particular, the new plans to permanently raise the threshold for small business rate relief will impact on local government revenue in the short-term, and will reduce the annual funding available for local government by at least £1bn when business rates are devolved in 2020.
It’s good to see a commitment from the Government to compensate local authorities for this, but it will be important to retain incentives for places to grow local tax revenue, rather than distributing money from a national fund. Local leaders have had to overcome significant challenges to agree devolution deals in the first place—now the Government must keep to its end of the bargain, and ensure local areas can deliver the services expected of them and benefit from the decisions they make.

Fewer benefits, help to work

Andrew Haldenby, Director of the Reform think tank
The Budget leaves the direction of the Government’s welfare reforms unchanged. Ministers are making much more effort to overcome barriers to employment due to ill health and disability. The Budget reported that the Government intends offering new support for those suffering from mental health conditions and for young disabled people. Later this year, it will publish a White Paper “focusing on the roles that the health, care and welfare sectors can play in supporting disabled people and those with health conditions to get into and stay in work." At the same time eligibility for benefits will be reformed where appropriate, with the most recent example being last week’s changes to the Personal Independence Payment, for some disabled people, which are expected to save £1.2bn. The new lifetime ISA, intended to encourage saving, is predicted to add 0.3 per cent to house prices by 2021, thus joining the list of Treasury measures which have fuelled demand for housing and arguably reduced opportunity. The wider impact of the lifetime ISA, with quite generous taxpayer-funded incentives, remains to be seen.

We need more than just a sugar tax

David Buck, Senior Fellow at the King's Fund health charity Childhood obesity is one of the most significant public health challenges facing the UK—one in four children is overweight or obese before starting school. The Chancellor’s surprise sugar levy on sugary drinks will help combat this. But as reports from Public Health England and the Health Select Committee have made clear, it is not alone sufficient to solve the problem. Product reformulation and marketing must also be part of the mix. Getting the design of this levy right is vital. "Sin" taxes such as this have complex effects. If they work in changing behaviour, then by definition they reduce sales and therefore do not raise much revenue through levies (and vice-versa). In order to be effective, the evidence suggests that levies need to be set at 20 per cent of prices—quite a hit. The Chancellor has given the soft drinks industry some breathing space by announcing a delay of two years before bringing in the tax, so manufacturers can work on moving the consumer towards low sugar alternatives. The real impact of the tax may therefore be indirect, through product and marketing changes before it is levied, rather than after. If that is true then the sugar tax may be more important than it at first appears.

Why change course?

Andrew Lilico, Executive Director and Principal of Europe Economics, an economics consultancy Osborne did not have to change his fiscal plan much in this budget; growth forecasts gave him no reason to. But he did have two problems in the run-up to today. The first was that he was going to miss his debt target this year. It was too late to change that. The second was that he was going to break his rule mandating a fiscal surplus later in the Parliament. The way he dealt with that was through some accounting adjustments in the timing of tax receipts and spending cuts.
In terms of the microeconomic aspects of the Budget, the big headlines will presumably revolve around the new tax on sugary drinks and the Office for Budget Responsibility’s remarks about the short-term impacts of Brexit (which Osborne communicated). Underneath the surface, perhaps the most important change Osborne appears to be implementing is his significant reform to the taxation of business and capital, with the plans for a 17 per cent corporation tax rate, 20 per cent capital gains tax, debt interest tax deductibility limits and business rates returned to local authorities. Expect to see more on this later in the Parliament.