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Ongoing austerity a balance for Osborne's pre-poll giveaways

In his penultimate Budget before the next General Election, George Osborne needed to demonstrate that his approach to addressing the UK's economic challenges and building a resilient economy is working.

Mindful of September's Scottish independence referendum, he also wanted to throw in a few specific measures to convince Scots that they really are, to coin a phrase, better together within the union.

Unsurprisingly the Chancellor turned his initial focus on the positives and, to be fair, there are reasons for him to be cheerful compared to last year: UK economic growth has exceeded forecasts, inflation is below target and he has presided over a year on year reduction in the deficit, a key pledge of the Coalition Government.

However, as predicted, he also sounded a warning about the continuing structural deficit in public finances. As a result this Budget was fiscally neutral with net tax reductions paid for by spending reductions elsewhere.

Austerity is far from over was the blunt message. More spending cuts across most government departments will follow and a long term welfare cap - an issue which plays well with many Tory and, perhaps more importantly, UKIP voters - has been put in place.

To strike the balance between maintaining restraint while seeking to further stimulate the economy, Mr Osborne is looking to boost exports and unlock investment into UK business. His pledge to reduce energy costs of businesses and provide cheaper export finance, for example, should help UK manufacturing, a sector which he clearly wants to be seen to be helping. 

The extension and doubling of the annual investment allowance to £500,000 has also been welcomed by capital intensive businesses while a further increase in the cash back for SMEs carrying out R&D and the extension of the seed investment scheme shows further commitment to making the UK even more competitive.

This Budget was however not simply about getting the economy on track - Mr Osborne was appealing for electoral support, starting with the grey vote. His pensions reforms, specifically aimed at targeting the demographic which is most likely to vote, are also an ideal source of government revenue.

The changes which give pensioners flexibility in accessing pension funds and remove the 55 per cent tax charge on draw-downs is forecast to bring in over £3bn of revenue over the next five years. 

Savers are also being courted in this Budget with the removal of the 10 per cent tax rate on savings income of up to £5,000 together with the increased, and more flexible, £15,000 tax free ISA allowance. Combined with new voluntary national insurance contributions to help top up state pensions over the next two years, the pension reforms cover this so-called savings giveaway with over £1bn to spare.

The anticipated increase in personal allowance exemption to £10,500, a measure driven by the Chancellor's Liberal Democrat Coalition partners, represents a modest tax cut although as this is not aligned to the point where NICs kick in, it will not help those on the lowest of incomes.

Passing on the personally allowance increase to those with incomes of up to £100,000 is possibly a hint of a bigger give away for the squeezed middle class next year, just before the General Election.

While the Scottish dimension did feature in the speech, unsurprising given the forthcoming referendum, the Treasury's Budget papers contain their own detailed section on Scotland and how, in its view, it would fare better remaining within the UK.

In addition to wider policies aimed at benefitting SMEs and core Scottish economic sectors such as technology, manufacturing and agriculture, there were other Scotland-specific measures. These include the freeze on spirits which benefits the Scottish Whisky industry and targeted measures to promote investment and maximise the value of the North Sea oil sector.

The Treasury's Budget papers also highlighted that 2.3m Scots have benefited already from the personal allowance increases and 263,000 have been lifted out of income tax altogether.

Even with the continuation of austerity and his overall fiscal credibility underpinning the Budget, the Chancellor he had at least one eye on September's independence referendum and next year's General Election.

John McAuslin is a Tax Director at Johnston Carmichael's Glasgow office

Contextual targeting label: 
Local government

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