The unanticipated Conservative majority is likely to be followed by George Osborne delivering his first Conservative budget as early as next month.
As we know Mr Osborne is committed to eliminating the current deficit of £87 billion by the end of this parliament. What will make the budget interesting is how the government will set about achieving this, whilst also incorporating their pre-election promises, which included raising the personal tax allowance to £12,500 and the higher rate threshold to £50,000 by 2020, whilst promising no increase in VAT or National Insurance.
With the above in mind it means that the only way to reduce the deficit will be through cuts in expenditure. Funding for health, education and pensions are either protected or set to increase, which means that welfare will be the area affected most – in particular the tax credit system that was introduced by Gordon Brown.
The impact of the tax credit system on the economy is quite fascinating. In essence what the tax credit system does is increase the supply of labour –by working a few hours a week individuals qualify for tax credits that result in receiving more money than their wage. In turn this encourages employers to use labour, because they can pay lower wages, rather than make capital investment. However over time this means that the products produced in the UK won’t be using the latest technology and will eventually be considered inferior. Eventually no one will buy the inferior goods regardless of how cheaply they are priced and the UK has a problem.
Last week the Bank of England left interest rates on hold and earlier this week it published its Quarterly Inflation Report, which resulted in a reappraisal of Britain’s growth prospects from 2.9% down to 2.5%. Whilst the markets are now expecting a base rate rise in Q2 2016 some economists believe the base rate could be increased sooner, given the record low of 0.5% and expected rise in inflation later this year.
Over the past few months Savings Champion has spoken to a number of people that have delayed financial planning decisions in anticipation of the election result. If you have found yourself in this position and now wish to take action, you may find the following guides very informative or call us on 0800 321 3581.