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 2014 Economic and Fiscal Outlook, we made adjustments to inflation and business investment.
This box considers the possible effects on the economy of policy measures announced in Budget 2014. More details of each measure are set out in the Treasury’s Budget document and our assessment of the fiscal implications can be found in Chapter 4.
The Government has announced a number of measures between 2014-15 and 2018-19 that are expected to have a neutral fiscal impact, 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 adjusted its assumption for the growth of Total Managed Expenditure beyond 2015-16 and reduced spending further on top of that change. The overall effect of these changes leaves spending as a share of GDP little changed from our December forecast. Within total spending, the level of implied resource DEL, the key input into our economy forecast, is little changed from our December forecast: so nominal government consumption is expected to be just 0.4 per cent higher by 2018-19 than in December. At that time horizon, we assume any change affects the composition of GDP rather than the level, as monetary policy is assumed to determine the overall amount of spending in the economy.
We have examined measures that could directly affect the price level. Changes to air passenger duty bands, alcohol duty, tobacco duty and the lower trajectory of the Carbon Price Floor are expected to have very small and offsetting effects on inflation.
The Government has announced that the temporary increase in the Annual Investment Allowance will be extended for a further year, to December 2015, and increased to £500,000. This is likely to induce some firms to bring forward investment spending. Although all firms investing over £25,000 in plant and machinery qualifying for capital allowances will benefit, it is worth noting that only around 9 per cent of qualifying investment is spent by firms investing within the relevant threshold (and thus having the greatest incentive to bring forward investment). We have assumed that this measure leads to a total of just under £1 billion of business investment being brought forward from 2016 and 2017 into 2014 and 2015, based on the temporary effect of the measure on the cost of capital and the cash flow effect of the allowance. This is a small change relative to the size of the economy, so has a negligible effect on real GDP growth. As this is a temporary measure, it has no effect on the long-run cost of capital, and so the level of investment by the end of the forecast is unchanged.
The Government’s decision to increase the personal allowance could affect the labour supply decision of individuals at the margin – the higher personal allowance increases the reward to work. But given the small size of these potential effects we have not made any explicit adjustments to our forecast.
The Government has announced a package of savings and pensions measures. They include raising and equalising the limits for both cash ISAs and stocks and shares ISAs to one overall limit of £15,000; reducing tax on the first band of savings income from 10 per cent to zero and extending that band to £5,000; and the introduction of an attractively-priced National Savings and Investments (NS&I) product for pensioners. The Government has also announced a number of tax measures that increase the flexibility with which individuals can access their defined contribution pension assets.
It is likely that such measures will affect the composition of households’ financial and non-financial assets, as households reallocate assets to benefit from the different tax treatments. By reducing the extent to which the tax system discourages the withdrawal of pension saving, for example, it is possible that funds will be redirected from annuities into other assets, such as other financial products or housing. Some people will temporarily increase pension saving in order to benefit from tax-free lump sum withdrawals. It is also possible that such funds could be used to finance consumption, although such effects are likely to be small. The scale and timing of such effects are subject to very considerable uncertainty, not least because households are able to shift very large deposit balances over relatively short timeframes (see Box 3.4). 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 Government has announced that it will extend the equity loan element of the Help to Buy scheme from 2016-17. At this horizon, with the economy and financial system expected to have recovered further, we have not assumed any additional effect from the extension of the scheme. To the extent that any lending associated with this extension is additional, the measure would help to support our forecast for relatively strong rates of residential investment growth and the return of property transactions back toward a historical trend relative to the housing stock.