Background to the 2016 Budget

The briefing sets out the background to the 2016 Budget which will take place on Wednesday 16 March 2016. The Office for Budget Responsibility (OBR) will publish revised forecasts for the economy and public finances on the same day. 

Economic situation

Economic growth slowed in 2015 but remained solid at 2.2%, underpinned by strong increases in consumer spending. Inflation has hovered around 0% for most of the past year providing a boost to households’ spending power. Given the weak inflation rate, the Bank of England has kept its key interest rate at the historically low level of 0.5%, with most economists expecting them to leave it unchanged in 2016.

GDP growth in 2016 is forecast to be just above 2%, with consumer spending once again providing the impetus. Over the medium term, growth in the 2-2.5% range is forecast. Potential risks could come from the EU referendum in June, weaker-than-anticipated productivity growth, a recurrence of international financial market turbulence and fears over the global economy, particularly in emerging markets.

The number of people in employment rose in 2015, with the proportion of 16-64 year olds in work (74.1%) at its highest level since records began in 1971. Average earnings growth accelerated in the first half of 2015 to near 3%, but slowed towards the end of the year back down to 2%.

Public finances

The budget deficit – the difference between what the government spends and receives in revenues – is forecast to be £74 billion in 2015/16, this is equivalent to 3.9% of GDP. The Government plans to eliminate the deficit by 2019/20 and the Office for Budget Responsibility’s (OBR’s) November 2015 forecast suggests it is on course to do so.

At over 80% of GDP, Public Sector Net Debt – broadly speaking the stock of borrowing arising from past deficits – remains high by recent standards. The OBR forecast that the debt to GDP ratio will fall in 2015/16 and continue to do so over the following five years.

Business rates review

The Government has committed to publishing a review of the administration of the business rates system in England alongside the 2016 Budget. There are few indications of the likely conclusions of the review, but media commentary suggests that no major changes are anticipated.

Pensions tax relief

The Government had been expected to respond in Budget 2016 to its consultation on pensions tax relief. However, over the weekend of 5-6 March, it was reported that no major changes to tax relief on contributions would be announced in this Budget.

Other information

The Library has published a Budget edition of economic indicators.

The Office for National Statistics will publish labour market statistics on the day of the Budget. The Library’s Unemployment by Constituency briefing will be published by 2pm on the same day.