posted on 18 March 2016, updated on 18 March 2016
Overview
The government published its Budget on 16 March 2016.
Faced with worsening economic and fiscal forecasts, the chancellor has chosen to stick to his fiscal targets, and to meet these with a combination of future savings, tax rises and some shifts between financial years.
The choices made by the chancellor are significant. He has chosen to carry on with proposed cuts in income tax, sticking to the government’s manifesto promise to increase the threshold for higher-rate income tax payers (from £42,500 to £45,000) and to increase the personal allowance (to £11,500). The cost of both these measures is £2.0bn in 2017/18, rising to £2.5bn in 2018/19.
He has also announced further cuts in spending, with a ratio of cuts to tax increases of about 4:1. The government is aiming to make additional savings of £3.5bn by 2019/20.
Overall growth forecasts from the Office of Budget Responsibility have been reduced, in line with most commentators who are still predicting moderate but consistent levels of GDP growth. The drivers for the lower forecasts are a combination of the external uncertainty and risks in the global economy, as well as a lower forecast of productivity growth in the UK economy. The reduced – and sustained – growth estimates will put pressure on tax receipts and on the chancellor’s ability to eliminate the budget deficit by 2019/20.
Business Rates
There are more changes to business rates, which will make the operation of the retained rates system more complicated, and will increase the level of uncertainty for future funding levels:
- The threshold will be increased from £6,000 to £15,000, and for higher rate from £18,000 to £51,000. This will affect a huge number of businesses, with many now taken out of rates and many paying reduced rates.
- Increase in the multiplier will be switched from the Retail Price Index (RPI) to the Consumer Price Index (CPI) in 2020. CPI tends to go up more slowly than RPI so this change is likely to reduce the buoyancy in the tax yield. Over time this will have a significant impact on the resources that are available to local government as a sector.
- Full business rate retention will start in London from April 2017, three years earlier than in the rest of England, with an increase in the share of London’s business rates retained by the Greater London Authority.
Devolution
Mayoral devolution deals have been agreed with West of England, Lincolnshire and East Anglia. These were unexpected and indicate that the elected mayor approach can and will be rolled out to shire areas.
Additional devolution deals have been agreed with Greater Manchester and Liverpool City Region. Criminal justice powers will potentially be devolved to Greater Manchester. Greater Manchester and Liverpool will also pilot 100% retention – along with London – from 2017. This offer is open to any devolution area with an elected mayor.
Additional funding (£2.86bn) is being made available to existing devolution deals through the gain-share mechanism. Devolution areas can draw down funding from their ‘pot’ if they achieve certain objectives or targets that have been agreed with the government. All devolution deals that include an elected mayor have similar gain-share arrangements.
Infrastructure
The chancellor announced an increase in capital investment in cash terms and as a percentage of GDP. Following advice from the National Infrastructure Commission, various schemes have been given the go-ahead, including HS3, widening the M62, potential for a tunnel from Sheffield to Manchester, and Crossrail 2 in London.
Flood defences
The government is going to spend an additional £690m over the next four years on flood defences, mostly in Cumbria, the Calder Valley and York. The recipients of the funding will depend on the scheme, but we would expect most to be received by the Environment Agency. This programme will be funded by increasing the standard rate of insurance premium tax by 0.5%. From 2017/18 this raises over £200m per year.
Social housing
Various measures affecting social housing were announced. The cap on housing benefit (linked to the relevant local housing allowance rate) will be deferred for supported housing (until at least April 2017) to allow government time to review what is happening to supported housing. In addition the 1% reduction in social rents will be deferred until 2017/18 for supported housing. Right to buy pilots have been announced with five housing associations.
Schools
All schools will become academies by 2020 (primary, secondary) – or at least they will be in the process of becoming an academy by that time. The assumption is that the impact on local authorities will largely be an extension of the existing process of removing funding as more schools become academies; this will happen through the withdrawal of Education Support Grant.
A ‘fair’ national funding formula is being introduced, as was already known – the chancellor has announced £0.5bn to speed up its introduction. It is intended that 90% of schools will be on the new formula by the end of the Parliament. The DfE published a consultation on 17 March 2016.
Pensions
The Treasury consulted on changes in pensions over the summer, and, in the Autumn Statement, a decision on pensions was promised in the Budget. However following political pressure the chancellor has not made any real changes to pensions.
CIPFA comment
CIPFA CEO, Rob Whiteman, raised the following concerns about government medium-term planning and the impact tax changes will have on local authorities:
“This is a budget of surprises. Big changes since the Autumn Statement, just three months ago, show a failure to plan for the medium term. The tax cuts announced show that the chancellor has chosen to make £3.5bn extra cuts to public services, rather than it being entirely necessary.
“While councils will welcome reduced costs for small businesses, they are likely to feel as though they’ve been stitched up. Business rate revenues are planned to replace Whitehall grants but have now been cut with no warning.
“We will monitor plans to compensate councils closely to make sure they’re not left out of pocket. We wish to check HMT assurances of ‘compensation’ is hard cash and not just ‘spending power’ sleights of hand.
“Raising employer contributions for public sector pensions is a stealth cut – meaning money is diverted from services back to the Treasury.”
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