Hello readers, welcome back to my blog on interesting economics news stories. Last time, I discussed whether or not it makes sense to purchase second-hand cars in economic terms, and I looked at a concept known as Akerlof’s lemon theory. I hope that you found it useful and are now starting to understand how economics can play such a pivotal role in our day-to-day lives. In today’s post, I will be going back to discussing current economics news. If you’ve been keeping up to date with the news, you might recall that the 8th of March 2017 was the date that the Chancellor of the Exchequer, Philip Hammond, presented his Budget to parliament. Within this post, I will outline some of the key things that emerged from this and how these changes could affect you, as well as what you need to be aware of. I will briefly outline at the start, what the Budget is for those of you who don’t know. I will keep this post short and to the point, and hopefully be the end of it, you will have a clearer idea as to where the UK economy could be headed. As per usual, please post any questions below or email them directly to me at email@example.com
What exactly is the Budget?
As I mentioned in the autumn statement post a few months back, the government makes two major speeches a year about how it is going to spend the nation’s money, which it receives from taxes. This includes the types of services e.g the NHS and may involve fiscal austerity, which is where government borrowing is reduced in order to cut the size of the deficit. The budget is the first of the two speeches and it is worked out by the Chancellor and his office, the Treasury. The reason for this is so that the government can work out what to spend its limited amount of money on, in order to maximize utility and create the best possible outcome for the UK. Just like you decide how to spend your income, the government has to work out how much to spend on schools, police, and housing. By tradition, the budget takes place in the spring, although the chancellor can give an extra update on the country’s economic position later on in the year if required, as was the case in July 2015, when an election had just taken place. The Budget is also supposed to be where the Chancellor discusses tax plans (fiscal policies) whereas the Autumn Statement is more about predictions for the economy and how much different government departments could spend. Although this is not set in stone and some tax plans are often included in the Autumn Statement. That being said, it was announced back in November, that from now on there will not be an Autumn Statement anymore and there will just be an annual budget.
The Key Points you need to know:
Although the Budget looks at a number of different aspects of the economy from health care to education to savings and taxes, I have put together a list of the ten things I think are most important:
- The economic forecast:
Unemployment is at an all-time low and the number of people employed in the UK sits at 31.8 million. The Office for Budget Responsibility (OBR) forecasts growth of 2% in 2017. The rate of inflation in the UK rose to 2.3% in February 2017. The Bank of England has decided to keep the interest rate (base rate) at 0.25%, as they don’t want to make any major changes in the economy particularly since we are in the middle of brexiting. However, if inflation continues to rise past the Bank of England’s target, this will have to increase.
- Cutting borrowing and stabilising the public finances:
Britain has a debt of nearly £1.7 trillion – around £62,000 for every household in the country. In 2009-10 the UK borrowed £1 in every £5 that was spent. This year it is set to be £1 in every £15. Borrowing is forecast to be reduced by nearly three quarters by 2016-17.
- The NHS:
There is set to be £425 million investment in the NHS in the next three years. In addition, £2 billion will be spent on adult social care over the next three years. This will help councils to provide high-quality social care to more people and will ease the pressure on the already overworked NHS.
£536 million will go to new free schools. £216 million will be invested in school maintenance.
5. National Productivity Investment Fund (NPIF):
The government is funding improvements to infrastructure, including:
- £690 million for new local transport projects, to improve congestion on roads and public transport
- £220 million to improve congestion points on national roads, with £90 million going to the North and £23 million to the Midlands
- Supporting local projects in the next twelve months like improvements on the A483 corridor in Cheshire and on the Leicester Outer Ring Road
- A new strategy to make the UK a world leader in 5G technology
- £16 million for a national 5G Innovation Network to trial new 5G technology.
- And £200 million for local projects to build fast and reliable full-fibre broadband networks.
6. The main rate of National Insurance contributions (NICs) for the self-employed will increase.
Currently, the self-employed may have to pay both Class 4 and Class 2 NICs:
- Class 4 NICs at 9% are paid on profits between £8,060 and £43,000
- Class 2 NICs are paid on profits of £5,965 or more
From 2018, Class 2 NICs will be abolished. Class 4 NICs will rise to 10% in April 2018 and to 11% in April 2019.
Taken together, only a self-employed person with profits over £16,250 will have to pay more as a result of these changes. This better reflects the fact that the differences in contributory benefit entitlement between the self-employed and employees are now small, following the introduction of the new State Pension in April 2016.
- Sugar Tax:
Sugar Tax set at 18p and 24p per litre for the main and higher bands (more than 5g of sugar per 100ml and more than 8g per 100ml respectively).
The vehicle excise duty for hauliers nd HGVs remains frozen and there have been no changes to duties on alcohol and tobacco.
8. ‘National living wage’
Rises to £7.50 an hour in April. This is merely confirmation of what Hammond said in last November’s autumn statement. It is a rise, but not enough to meet the target of £9 an hour by 2020 on its current trajectory.
9. Scotland, Wales and Northern Ireland
- £350m for the Scottish government.
- £200m for the Welsh government.
- £120m for the Northern Ireland executive.
May has placed a huge emphasis on keeping the union together. She is strongly discouraging calling a second referendum as she believes we are better off together. Slightly contradictory perhaps, since she is taking the UK out of the EU and breaking up close connections.
10. Tax avoidance
- £820m of tax avoidance measures.
- VAT on roaming telecoms outside the EU.
- New financial penalty for professionals who create schemes defeated by HMRC.
- Stop businesses converting capital losses into trading losses.
Crackdowns on tax avoidance have become a key aspect in the Budget. This is to stop the unfairness in the tax system, with added penalties on accountants who help people to try to dodge their liabilities.
Still want more information about the budget?
Check out the short video clip by the Guardian https://www.theguardian.com/uk-news/video/2017/mar/08/budget-2017-what-it-means-for-you-collinson-video-analysis