The Chancellor delivered a relatively upbeat assessment of the UK economy in an Autumn Statement that, among other things, also introduced a rise in the state pensionable age and some new tax avoidance measures.
Brighter prospects ahead?
Chancellor of the Exchequer
George Osborne delivered a relatively optimistic assessment of the UK economy
in his 2013 Autumn Statement. He hailed the ongoing recovery – the UK economy
is growing more rapidly than that of any other major advanced nation, including
the US and Germany – but warned that the country remains particularly
vulnerable to future shocks from the eurozone.
Economic growth is picking up
The UK economy appears to be
recovering more rapidly than expected. The Office for Budget Responsibility
(OBR) more than doubled its forecast for economic growth this year from 0.6% to
1.4%, and also raised 2014’s prediction from 1.8% to 2.4%.
However, the forecasts for
the following three years were trimmed to 2.2%, 2.6%, and 2.7% respectively.
Looking back, the UK economy contracted more sharply than previously calculated
during the recession – although the UK managed to avoid falling into a
“double-dip” recession, the economy actually contracted by 7.2% from peak to
trough in 2008/09, compared with earlier estimates of 6.3%.
Budget surplus sooner than expected
Government borrowing has
fallen “significantly more than forecast” and the UK budget is predicted to be
in surplus by 2018/19. The underlying deficit has fallen from 11% of GDP in
2010 to 6.8%, instead of the 7.5% forecast in March. The deficit is predicted
to decline to 5.6% next year and to continue to fall over the following three
years – by 2018/19, the OBR expects the UK to be running a budget surplus.
Cash borrowing is lower than
expected. The UK will borrow £111bn during 2013 – £9bn less than previously
estimated. Borrowing is then predicted to fall to £96bn next year, £79bn in
2015/16, £51bn in 2016/17, and £23bn in 2017/18. Overall, the government
expects to borrow £73bn less over the period than expected.
Longer life – but a longer working life
A rise in the state
pensionable age will be imposed earlier than expected, beginning in the
mid-2030s rather than in 2046. The government plans to increase the state
pensionable age to 68 in the mid-2030s and to 69 towards the end of the
following decade. The increase in pensionable age is intended to keep track
with increased life expectancy.
The government also intends
to introduce a cap on total welfare spending, but this will not include the
basic UK state pension or the “most cyclical of benefits for jobseekers”. The
state pension will increase by £2.95 per week from April 2014 and individuals
of pensionable age will be allowed to make additional voluntary National
Insurance contributions to help boost their state pension.
Tax breaks and tax avoidance
The personal income tax
allowance will increase to £10,000 from April 2014 and, from April 2015, the
government will introduce a new transferable tax allowance for married couples
and civil partners who pay the basic rate of tax. New rules on tax avoidance
will also be introduced, and are projected to raise a total of £9bn over five
years. Non-UK residents who sell residential property in the UK will become
liable to pay capital gains tax from April 2015.
The Chancellor abolished
stamp duty on shares bought in exchange traded funds (ETFs), in order to help
persuade ETFs to situate themselves in the UK. The levy on banks will be
increased to 0.156% from 1 January 2015 in a move expected to raise £2.7bn in 2014/15
and £2.9bn each year from 2015/16.
A helping hand for small businesses?
Business rate relief for
small businesses was extended for another year. Increases on business rates in
England and Wales will be limited to 2%, and firms will be allowed to pay their
business rates in 12 monthly instalments. The Chancellor also announced a
£1,000 discount on business rates for smaller shops, pubs, and restaurants for
the next two years
Unemployment set to fall
The rate of unemployment is
forecast to fall from 7.6% this year to 7% in 2015, and is expected to reach
5.6% by 2018. This is particularly significant because the Bank of England has
stated an unemployment rate of 7% is the threshold at which policymakers will
consider tightening monetary policy. Elsewhere, in a bid to improve prospects
for youth employment, the Chancellor announced a plan to remove employers’
national insurance contributions from April 2015 on 1.5 million jobs for young
people
More to do
Reacting to the Statement,
the Confederation of British Industry commented: “As we enter the festive
season, positive news on growth is clearly welcome but much remains to be done
if the benefits of economic recovery are to reach every home in every corner of
the UK.” For its part, the Ernst & Young ITEM Club pointed out the
improvement is, at this stage, cyclical rather than underlying, and concluded
this is “not an opportunity for a fiscal relaxation”.As is always the case with complex legislation such as this, it pays to seek advice from a professional financial planner.
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