BUDGET 2014 HC 1104 March 2014 BUDGET 2014 Return to an order of the House of Commons dated 19 March 2014 Copy of the Budget Report – March 2014 as laid before the House of Commons by the Chancellor of the Exchequer when opening the Budget. Sajid Javid Her Majesty’s Treasury 19 March 2014 Ordered by the House of Commons to be printed 19 March 2014 HC 1104 © Crown copyright 2014 You may re-use this information (excluding logos) free of charge in any format or medium, under the terms of the Open Government Licence v.2. To view this licence visit www.nationalarchives.gov.uk/doc/open-government-licence/version/2/ or email [email protected] Where third party material has been identified, permission from the respective copyright holder must be sought. This publication is available at www.gov.uk/government/publications Any enquiries regarding this publication should be sent to us at [email protected]. Print ISBN 9781474100700 Web ISBN 9781474100717 Printed in the UK by the Williams Lea Group on behalf of the Controller of Her Majesty’s Stationery Office ID 2626361 37630 03/14 Printed on paper containing 75% recycled fibre content minimum The Budget Report is presented pursuant to section 2 of the Budget Responsibility and National Audit Act 2011 and in accordance with the Charter for Budget Responsibility. The Budget Report, combined with the Office for Budget Responsibility’s Economic and fiscal outlook, constitutes the Government’s assessment under section 5 of the European Communities (Amendment) Act 1993 that will form the basis of the Government’s submissions to the European Commission under 121 TFEU (ex Articles 99/103 TEU) and Article 126 TFEU (ex Article 104/104c TEU) after the assessment is approved by Parliament. Contents Page Executive Summary 1 Budget Report Chapter 1 Budget Report 9 The UK economy and public finances 9 Growth 31 Fairness 42 Chapter 2 Budget policy decisions 55 Annex A Welfare cap 87 Annex B The UK’s long-term debt challenge 89 Annex C Financing 101 Office for Budget Responsibility: Budget forecast Annex D Office for Budget Responsibility’s Economic and fiscal outlook: selected tables 105 List of abbreviations 117 List of tables 120 List of charts 121 List of figures 121 Budget 2014 Executive Summary This Budget sets out further action to secure the recovery and build a resilient economy. The government is continuing to take difficult decisions to put the public finances on a sustainable path. The Budget supports businesses to invest, export, and create jobs, and cuts taxes for hard- working people – laying the foundations for sustainable economic growth. The Budget sets out the most radical reforms to saving for a generation, providing security for families to plan for their future. The UK has been hit by the most damaging financial crisis in generations and the government inherited the largest deficit since the Second World War. The government’s long-term economic plan has protected the economy through a period of uncertainty, and provided the foundations for the UK’s economic recovery which is now well established. Since Budget 2013, economic growth has exceeded forecasts, inflation is below target, and the deficit has been reduced year on year. However, the job is not yet done and more work will be needed to tackle historic weaknesses, including low productivity, poor skills and inadequate infrastructure. Budget 2014 sets out the next steps in the government’s long-term economic plan: The UK economy and public finances: the deficit as a share of GDP is forecast to have fallen by a half by 2014-15 compared to 2009-10, and the Office for Budget Responsibility (OBR) forecasts a small surplus by 2018-19. Budget 2014 announces further detail on the difficult decisions needed to reduce the deficit and debt beyond this Parliament, including setting the level of the welfare cap and controlling the cost of public sector pay and pensions. Growth: a record number of people are in work and business investment is forecast to increase this year. Budget 2014 sets out further action to help businesses invest and export, to reduce energy costs – especially for manufacturers – and to increase housing supply. Fairness: Budget 2014 delivers an income tax cut for 25 million people, with 3.2 million low earners being lifted out of income tax altogether through increases in the personal allowance. Budget 2014 announces radical reforms to give people greater freedom over how they access their pension savings and to support savers at every stage of their lives. The UK economy and public finances The government’s long-term economic plan has protected the economy through a period of global uncertainty and provided the foundations for the UK’s economic recovery. GDP growth has exceeded forecasts and has been balanced across the main sectors of the economy. However, the job is not yet done. Abandoning the government’s long-term economic plan and the path of fiscal credibility would represent the most significant risk to the recovery. The UK also faces a number of external risks, including slowing growth and financial instability in some emerging markets, and ongoing weakness in the euro area. The situation in Ukraine is a new risk, and any further deterioration is likely to have some impact on the UK. The performance of the UK labour market has continued to improve, with a net increase of over 1.6 million jobs in the private sector. A record number of people are in work, and all nations and regions of the UK have seen an increase in employment. Only a sustained economic recovery, with growing productivity, will deliver a lasting improvement in living standards. The OBR forecasts that real household disposable income per capita will grow in 2014 and throughout the forecast period. Budget 2014 1 Activity is expanding across all sectors of the economy. The OBR judges that business investment activity is likely to gather pace this year, and has revised up its forecast for business investment growth from 5.1% to 8.0% this year. Exports of goods to countries outside the EU have risen by 23% since 2010 and exports of goods to the EU by 8% – but export performance needs to improve to support a balanced recovery. Economic forecast The OBR has revised up its forecast for GDP growth from 2.4% to 2.7% in 2014 and from 2.2% to 2.3% in 2015, and forecasts GDP growth of 2.6% in 2016, 2.6% in 2017 and 2.5% in 2018. It expects GDP to return to its pre-crisis peak in the third quarter of 2014. The OBR has revised up its forecast for employment across the forecast period and expects employment to reach 31.4 million by 2018. At the start of 2014 the claimant count was 1.2 million, the lowest level since December 2008, and the OBR now expects it to fall below 1 million in 2017 for the first time since 2008. The OBR expects CPI inflation to be below target at 1.9% in 2014 and then to stay at the 2.0% target for the rest of the forecast period. It expects average earnings to grow faster than inflation throughout the forecast period. Fiscal forecast The government remains on course to meet the fiscal mandate one year early, in 2017-18. ‘Underlying’ public sector net borrowing as a percentage of GDP is forecast to have fallen by half from its 2009-10 peak by 2014-15, and the OBR forecasts a small surplus in 2018-19. The supplementary debt target is missed by one year, as forecast at Autumn Statement 2013. Public sector net debt is forecast to peak at 78.7% of GDP in 2015-16 – 1.2% lower than forecast at Autumn Statement 2013 – before falling each year and reaching 73.8% of GDP in 2018-19. The government’s response The government has set out a credible plan to eliminate the deficit over the next 4 years, but further difficult decisions are required. High levels of public debt impose significant burdens now and in the future through higher interest rate payments, and increase the UK’s vulnerability to future shocks. Given these costs and risks, once the supplementary debt target has been met, any future government will need to ensure that debt falls as a percentage of GDP. In recognition of the need to continue reducing the deficit and debt, this Budget: • is fiscally neutral despite lower borrowing across the forecast period, with an overall reduction in tax funded by a reduction in spending • sets the level of the welfare cap from 2015-16 to 2018-19 at the OBR’s forecast of spending in scope, with a forecast margin of 2% above this level; the government is modifying the Charter for Budget Responsibility to include the new welfare cap alongside the fiscal mandate – and this will be voted on by the House of Commons • confirms that departments remain ahead of their consolidation targets; the OBR forecasts that departments will underspend by £7 billion in 2013-14, and will continue to underspend until the end of this Parliament • reduces spending in the next Parliament by locking in spending reductions announced at Autumn Statement 2013 for future years 2 Budget 2014 • ensures that employers are meeting the costs of public service pension schemes, and confirms that pay awards for most public sector workers covered by the recent Pay Review Body recommendations will be limited to 1% in 2014-15, and that the intention is to limit awards to 1% in 2015-16 The government will also introduce a new and highly secure £1 coin.