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Budget 2016 Overview

It was famously said that ‘all roads lead to Rome.’ In British politics, all speeches currently lead to the EU Referendum. George Osborne’s Budget speech, delivered on Wednesday March 16th, was no exception.

More than ever, the Chancellor was seeking to balance politics and economics as he rose to speak. On the politics front, there were a good many restive backbenchers behind him who had already put paid (at least for now) to the Chancellor’s widely-trailed intentions to reform tax relief on pension contributions. There was also an electorate to convince – and the Chancellor’s own political ambitions. Make no mistake, if the ‘Leave’ camp wins the EU referendum, George Osborne’s chances of succeeding David Cameron in the inevitable leadership battle are almost non-existent.

So the political background to the speech was tricky: but not quite as tricky as the economic background.

The Chancellor has not only made his economic commitments public, he’s also passed them into legislation. The fiscal charter commits him to doing three things:

  • Returning the Budget to surplus within four years and to spend less than his income. He has to do this unless the OBR allow him to suspend the fiscal charter, due to GDP either being less than (or forecast to be less than) 1% on a rolling four quarter on four quarter basis.
  • He has also promised to see debt fall as a percentage of the economy in this financial year, and in every financial year through to 2020. This may mean selling some state assets – such as the shares in RBS and Lloyds – but this remains the Chancellor’s intention.
  • Finally, he also promised to keep welfare spending within strict limits.

These commitments would have been fine if the world economy was powering ahead, but a shaky start to 2016 has seen the global economic picture clouded with doubt. The slowdown in China continues, the ECB has just announced yet more measures to stimulate the Eurozone, and at home, the British Chambers of Commerce (BCC) has just downgraded its UK growth forecast for the next two years, cutting the expected growth for this year from 2.5% to 2.2%.

The Chancellor’s commitment on welfare spending has already been breached, and on the morning of the Budget the Financial Times headline was, ‘Osborne to break second promise in Budget of fiscal claustrophobia.’

So, in the short term, the Chancellor faced a very difficult speech; in the longer term he faced an increasingly uncertain political future.

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