The Budget 2014: An Edelman Analysis

BUDGET 2014 OVERVIEW Today’s Budget offered the Chancellor his last significant opportunity to set out his stall on why the electorate should trust him with the economy beyond the next election. The combination of an upgrade in growth forecasts, a further Income Tax cut for 25 million people, and a boost for British business by reducing energy costs should provide a compelling case for George Osborne’s approach.

The Coalition will be pleased that the public is finally starting to believe the worst is behind them as recent polls show that almost half the population now believe a recovery is on the way. If this trend continues then Labour’s core ‘cost of living crisis’ narrative will have less of an impact.

the end of this financial year, there is a lot of pain to come. In further cause for concern, the underperformance of key BRIC economies has raised questions as to whether the ‘export-led recovery’ will materialise any time soon.

This leaves all the political parties with a fascinating dilemma ahead of the General Election in 2015: on one hand they know they need to be realistic about their future spending plans to have credibility; but they also need to inspire confidence in a brighter future. In short, they need to decide how honest they can afford to be with the public and still attract votes.

Budgets are as much about what has not been said. The reality is that, despite optimistic forecasts, the recovery is very fragile. With only 40% of planned spending cuts in place by

POLITICAL REACTION Rt Hon Ed Miliband MP

Leader of the Opposition, Labour Party

“Classic Tory con. Give with one hand, and take far more away with the other.”

Norman Smith

Chief Political Correspondent, BBC News

“Booze, Bingo, Business and Savers. That’s your Budget 2014 Folks.”

Stephen Lotinga

Managing Director, Public Affairs

THE HEADLINES PREDICTED GROWTH

2.7%

2.3%

this year

in 2015

UNEMPLOYMENT Down by

Frances O’Grady

Secretary General, TUC

“Corporate tax cuts haven’t worked... What we need instead is the Government to encourage investment in skills. The Chancellor needs to make sure that the recovery is a fair one and people feel the benefit.”

John Longworth

2.6%

in 2016

63,000

DEFICIT

6.6%

in 2013/14

5.5%

in 2014/15

4.2%

in 2015/16

Director General, British Chambers of Commerce

“Business wanted a Budget that was disciplined, focused, and geared toward the creation of wealth and jobs – and that’s what the Chancellor has delivered.”

BORROWING

INCOME TAX THRESHOLD

£108 bn

Rises again to

this year

Jonathan Eley

£10,500

Personal Finance Editor, Financial Times

“Savers have been calling for help ever since the Bank of England cut its main interest rate to 0.5 per cent – today they got it in spades.”

Edelman | Southside | 105 Victoria Street | SW1E 6QT London | www.edelman.co.uk | 0203 047 2254 | @edelmanUK | 1

BUDGET 2014 SECTOR PERSPECTIVES INFRASTRUCTURE AND PROPERTY The Chancellor knows infrastructure isn’t just about the big projects. HS2 is important, but David Higgin’s recommendation in his report this week to engage more in local development is its real strength. Hence Benedict today’s Wales Bill, devolving powers to the McAleenan Welsh Assembly to fund infrastructure. The City Deals of recent months and a network of funded Local Enterprise Partnerships may do more to build confidence in the sector than any of this Budget’s announcements.

Thinking locally, some of the infrastructure announcements are politically useful. Osborne has thrown £140m at flood defences and £200m at potholes. Potholes may not seem glamorous, but they’re politically significant – two months before local elections, they will be discussed on doorsteps across Britain.

On housing, the Chancellor feels on firmer ground. His extension of Help to Buy is bold, but he knows industry must gear up: £500m to finance smaller building firms will help, although raw materials remain in short supply. However, the Ebbsfleet garden city is little more than a fig leaf and a re-announcement on long-earmarked land. We need sixteen Ebbsfleets annually to meet most estimates of demand.

FOOD, DRINK AND RETAIL The ‘steady as she goes’ approach to this year’s Budget will be broadly welcomed, as will the Chancellor’s dual focus on supporting consumer confidence and delivering sustainable business growth.

Anthony Marlowe Increasing the personal allowance from £10,000 to £10,500 will be considered good for customers and colleagues alike, as will the announcement on childcare.

Business Rates continue to be one of the retail sector’s biggest costs and there will be disappointment that the Treasury’s approach continues to be relatively piecemeal. Businesses will continue to call for a more fundamental review of the Rates system, considered not fit for purpose by many.

The Government’s decision to freeze duty on spirits (where 79% of the average price of a bottle is tax) and scrap the Alcohol Duty Escalator will be supported as a symbolic gesture to industry and voters alike that the Government is committed to easing the tax burden where it feels it has risen to unfair levels.

BUSINESS AND FINANCIAL SERVICES Given the continuing distrust of banks as most recently confirmed by the latest Edelman Trust Barometer, it is not surprising that the Chancellor chose to ignore calls from the banking lobby to reduce or even David Robertson scrap the bank levy. Instead he announced that a consultation paper on a new charging mechanism for the levy would be published on 27 March.

However, new Trade Minister Lord Livingstone’s appeal for more assistance to be given to medium-sized firms to export has been heeded. The Chancellor unveiled a package of measures including an overhaul of the UK Export Finance’s (UKEF) direct lending programme, doubling it to £3 billion and cutting interest rates to the lowest permitted levels. Small and medium-sized firms will also welcome the doubling of the Annual Investment Allowance (AIA) and its extension from April 2014 until the end of 2015.

Today’s Budget also provided reasons to cheer for the emergent peer-to-peer lending sector, with the announcement that ISA eligibility will be extended to peer-to-peer loans – likely also to be applauded by savers wishing to reduce risk by spreading investments across different sites.

ENERGY The 2014 Budget is a resounding victory for heavy industry, with the Chancellor announcing a £7bn package including: a freeze on the controversial Carbon Price Floor from 2016/17 to 2019/20; an extension of the energy-intensive industries compensation scheme; and an exemption from the costs of renewables subsidies.

Jessica Lennard

Together with another fuel duty freeze, the Government will be hoping the changes to the carbon tax (worth a £15 reduction on the average household bill by 2018) will diminish some of the public appeal of Labour’s price freeze. However, while the move will be welcomed by industry and consumer groups, it has been widely opposed by a rather incongruous lobby comprised of gas, low carbon technologies and NGOs. These groups argue that it allows coal fired power generation to remain economic for longer and potentially leaves a large gap in the availability of funding for nuclear and renewables.

Other measures included taking forward recommendations for a new regulatory and fiscal regime for North Sea oil and gas; an additional £140m of spending on flood defences; and a full exemption from the Carbon Price Floor for CHP. The Chancellor also increased the company car tax discount for ultra-low emission vehicles.

Edelman | Southside | 105 Victoria Street | SW1E 6QT London | www.edelman.co.uk | 0203 047 2254 | @edelmanUK | 2