How Does the UK Budget Measure up for Britons?
The 2016 Budget Speech in Perspective
Prior to analysing the implications of the Budget speech for 2016, it is important to gain a little perspective on the performance of the UK economy. The GDP growth rate is 0.5%, as at December 2015, with a previous GDP growth rate of 0.4%. The unemployment rate has been holding steady at 5.1%, and the inflation rate has crept up marginally to 0.3% for January 2016, from 0.2% in the previous reading. The interest-rate remains fixed at 0.5% and the U.K.’s balance of trade is – £3,459 million. The Government Debt/GDP ratio is marginally higher at 88.6%, up 1.3% on the previous reading. At the close of trade on Wednesday, 16 March, the GBP/USD currency pair was trading at 1.41, and the FTSE 100 index closed the day at 6,176 points. The aforementioned set of economic data presents a snapshot of the UK economy going into the 2016 budget speech.
Major Spending Cuts and Tax Cuts
George Osborne mixed a measure of bullish sentiment and caution when he delivered his budget speech for 2016 to Parliament. Among others, he reported on a strong labour market with high employment numbers and a slashing of the deficit by up to 67%, with the UK economy on track to a budget surplus in the not too distant future. Osborne was adamant that the budget plan focused on long-term solutions over short-term fixes. However he made no bones about the state of financial markets, with low levels of productivity across Western nations, and weak global prospects for the rest of the world. This budget was designed to bring about stability in the UK market above all else. The focus is on the long-term, and the next generation of future UK leaders. A strong emphasis was placed on saving, lengthening the school hours for kids in England, increasing the maximum earnings threshold before the highest possible tax rate is employed and so forth.
- Spending cuts up to £3.5 billion are being formulated
- The tax-free personal allowance will be increased to £11,500
- For savings purposes, the limit will be raised to £20,000 for ISAs
- Britain’s highest tax will be applied on earnings of £45,000 or greater (up from £42,385)
- A 3% tax on rolling tobacco will be implemented after 18:00, and 3% taxation will be levelled on people rolling their own tobacco after 18:00.
- Taxation will be levied on sugary drinks, and this is expected to bring in £530 million. It works out to an amount of £0.18 per litre to £0.24 per litre. The tax will be levied in two forms: 5 grams p/100ml and 8 grams p/100ml. The following software manufacturers will be subject to increased taxation: Coca-Cola, Irn-Bru, Pepsi, Fanta, Sprite, Schweppes Indian Tonic, and Lucozade Energy.
The Performance of the FTSE 100 and the GBP since the Budget Speech
After the Budget was announced, the FTSE 100 index gained 0.58% for the day, up 35.52 points to close at 6175.49. The improvement in the FTSE was largely due to the performance of major oil companies in British Petroleum and Royal Dutch Shell. As expected, the makers of soft drinks saw their share prices decline considerably. Britvic which makes Robinsons Squash fell sharply to 700p soon after the speech was given, while Vimto shed 7% and dropped to 1,219p. The British pound dropped against the US dollar by as much as 0.24%, to trade at 1.4118, and also slid somewhat against the euro to 1.2733. This was due to the reduced GDP forecast for 2016 and beyond.