In each Economic and fiscal outlook we publish a box that summarises the effects of the Government’s new policy measures on our economy forecast. These include the overall effect of the package of measures and any specific effects of individual measures that we deem to be sufficiently material to have wider indirect effects on the economy. In our March 2015 Economic and Fiscal Outlook, we made adjustments to nominal GDP, inflation and North sea production.
This box considers the possible effects on the economy of the policy measures announced in Budget 2015. More details of each measure are set out in the Treasury’s Budget document. Our assessment of their fiscal implications can be found in Chapter 4 and Annex A.
The Government has announced a number of policy measures taking effect between 2015-16 and 2019-20 that are expected to have a broadly neutral fiscal impact overall, with ‘giveaways’ offsetting ‘takeaways’ over this period. Using the same multipliers that the interim OBR used in June 2010, these measures are expected to have a negligible effect on annual GDP growth and have no effect on our GDP forecast. Given the relatively small size of these measures, using larger multipliers would not change this conclusion.
The Government has revised its assumption for the growth of total managed expenditure (TME) between 2016-17 and 2019-20, which has a material effect in 2019-20. TME is now assumed to grow in line with nominal GDP in that year, rather than being held flat in real terms. Within total spending, the change in the assumption implies a significant upward revision to the path of nominal government consumption in 2019, which is now forecast to grow by 5.0 per cent in that year, rather than falling 0.7 per cent in our December forecast. As a result, government consumption is now expected to remain broadly flat as a share of GDP between 2018 and 2019, rather than continuing to decline. At that time horizon, we have assumed this change affects the composition of real GDP rather than the level, as monetary policy is assumed to determine the overall amount of spending in the economy. But we have assumed that this adds around 0.6 percentage points to growth in the GDP deflator and nominal GDP in that year via its effect on the government consumption deflator.
The Government has announced a number of measures that will directly affect inflation. This includes a 2 per cent reduction in duty on most beer, cider and spirits and freezing duty on wine, relative to previously assumed increases in line with RPI in April, and the cancellation of the planned increase in fuel duty in September 2015 (in line with RPI inflation). These changes are expected to reduce CPI inflation by less than 0.1 percentage points in 2015 and 2016.
The Government has announced a package of policies affecting the North Sea oil and gas sector, including the introduction of a new investment allowance, a reduction in the supplementary charge on profits from 30 per cent to 20 per cent, and a 15 per cent reduction in petroleum revenue tax. All else equal, these measures would be expected to reduce the cost of capital associated with investment in the sector and therefore have a positive effect on capital expenditure and production, partially offsetting the negative effect of lower oil prices on the profitability of oil and gas extraction. We have assumed that these measures increase the level of oil production by 2019 by around 15 per cent, equivalent to around 0.1 per cent of GDP. This partly offsets the effect of the significant decline in the oil price since December, which in the absence of these policy changes we assume would have reduced the level of North Sea production by around 30 per cent. In Chapter 4 we provide greater detail on these pre- and post-measures assumptions that underpin our North Sea revenues forecast.
The Government has also introduced a scheme aimed at first-time house buyers. The scheme offers a bonus for first-time buyers saving for a deposit, equivalent to 25 per cent of the balance in the account, with a limit on the monthly deposit of £200 and a maximum Government bonus of £3,000. To the extent that this supports prospective first-time owner-occupiers relative to those looking to buy-to-let, then it is possible that the measure will lead to a change in the composition of transactions towards first-time buyers, although the effect on aggregate property transactions is unclear. In supporting overall demand for housing, it is also possible that the policy will add to house price growth, although given the scale of the scheme we would expect any effect to be negligible. We have therefore not adjusted our forecasts for housing transactions and house prices for this measure.
The Government has announced a number of measures relating to household saving. These include a tax-free allowance for savings income from April 2016 of £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers; a change to ISA rules that allows savers to withdraw and replenish funds in cash ISAs up to the annual limit; an extension to the ’pensioner’ bonds offered by National Savings and Investments; and measures that increase the flexibility with which annuity holders can sell their annuities for a cash lump sum. The net effect of these measures on aggregate spending and saving is highly uncertain. It is possible, for example, that the tax-free allowance will encourage households to change the composition of their saving assets. While a tax-free allowance will also provide an income boost to savers, the amount for most households will be small, suggesting a limited effect on aggregate consumption.
By increasing the flexibility with which individuals can sell an annuity, it is assumed that this will encourage a secondary market in annuities. If the creation of such a market is successful, it is possible that households’ funds will be redirected from the assets backing annuities into other assets. As with the pensions flexibility measures introduced in Budget 2014, it is possible that some people may temporarily increase pension saving. Alternatively, lump sums could be used to finance consumption, although such effects are likely to be small. As we consider the principal effect of these measures will be on the composition of household assets, rather than aggregate flow of saving or spending, we have not adjusted our forecast for these measures. The uncertainties associated with them are particularly large.
The Government has introduced measures specific to the financial sector, most significantly an increase in the bank levy from 0.156 per cent to 0.21 percent. These measures will have a negative effect on retained earnings, which may affect banks’ ability to meet capital requirements. To the extent that banks are capital constrained, the measures could affect the supply of credit and thereby GDP growth. However, we do not judge that such effects would be significant, given the scale of the changes and that the banking sector as a whole appears to be relatively well capitalised,a suggesting that material deleveraging would be unlikely. The changes are likely to have a small effect on the share prices of affected financial institutions by reducing the expected future flow of post-tax income.