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    UK cuts corporation tax but rise in minimum wage risks upsetting business

    The UK Chancellor of the Exchequer George Osborne delivered his first Conservative budget since the party won the May elections with an overall majority. In his speech, the Chancellor downgraded GDP growth forecast for 2015 to 2.4% (from 2.5%) but there was no change for 2016 forecast of 2.3% and 2014 growth was revised up from 2.6% to 3.0%. The budget deficit is expected to fall to 3.7% as a proportion of GDP in 2015/16, down from 10.2% in 2010. The government is hoping that years of austerity will help turn the deficit to a surplus of 0.4% in 2019/20.

    The big announcement of the budget speech was the £12 billion cut in welfare spending, which was widely expected. The cuts will be achieved through a series of reforms to housing benefits and tax credits, as well as a freeze on working age benefits.

    A further £5 billion in savings will come from tax evasion and avoidance schemes including the much-rumoured changes to non-domicile rules. The changes mean that non-domiciles who are resident in the UK for 15 out of 20 years will no longer be considered as non-doms for tax purposes. Shares in property and housebuilding companies immediately fell in London after the announcement as the measures are likely to deter wealthy foreign investors from the London property market.

    Another expected move was changes to inheritance tax, which raises the inheritance tax threshold to £1 million. Plans for devolving powers to cities in the North of England were also announced as part of measures to create a “Northern Powerhouse”.

    There were some surprises though such as a new apprenticeship levy to be applicable to all large firms, which is unlikely to be too popular among some businesses. But there were sweeteners for business with the announcement of a cut in the corporate tax rate from the current 20% to 19% in 2017 and to 18% in 2020. Businesses will also benefit from an increase in investment allowance to £200,000 and a reduction in employer’s National Insurance contributions.

    Bank shares got a boost after the announcement of the phasing out of the highly unpopular bank levy, which has threatened to force some banks, notably HSBC, to move their headquarters out of the UK. The bank levy will now be reduced over the next few years and replaced by a new 8% surcharge on bank profits. Insurers will suffer though as the insurance premium tax will rise from 6% to 9.5%.

    The biggest gamble by the Chancellor is likely to be the new national living wage. It will be effective from 2016 starting at £7.20 before rising to £9 per hour by 2020. It is estimated that up to 60,000 jobs could be lost as a result of the new minimum wage but overall jobs growth should stay positive.

    There were no major changes announced to personal income tax. The personal allowance will rise from £10,600 to £11,000 and the higher rate threshold will rise from £42,835 to £43,000. The top rate of income tax will stay at 45% despite calls from some Conservatives to lower it to 40%.

    London equities reacted positively to the budget and the FTSE 100 was up by around 1% after the speech ended. The pound was less responsive though and despite attempting to move higher at the start of the speech, it soon set back to the downward path it’s been on since late Wednesday. Sterling was trading below 1.54 against the dollar for much of the day and stood at 1.5367 in late European session. It was also down against the single currency at 0.7190 per euro and fell to 186.10 against the yen.

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