Unintended consequences of the 2015 Summer Budget

July 2015

Unintended consequences of the 2015 Summer Budget

In his 2015 summer Budget, the Chancellor of the Exchequer, George Osborne announced a raft of measures intended to “recognise the hard work and sacrifice of the British people” with a Budget that “sets out a plan for Britain for the next 5 years to keep moving us from a low wage, high tax, high welfare economy; to the higher wage, lower tax, lower welfare country.” 

With Budget measures including a new national living wage; an increase in the inheritance tax threshold to £1 million and personal tax allowance rising to £11,000, it also brought with it confirmation that Mortgage Interest Relief for buy-to-let Mortgages would be restricted to the basic rate of income tax; a reduction on the tax credit threshold from £6,420 to £3,850 and subsidies for social housing will be phased out.Naturally, since the 8 July Budget, a great deal of interpretation and analysis on how the changes will impact the UK economy and its people has been undertaken.

The Institute for Fiscal Studies (IFS) has suggested that 13 million UK families will lose £260 a year on average because of the Budget's tax and benefits changes, and that the tax credit changes could affect 3 million families, which are likely to lose an average of £1,000 per year, it said.Not surprisingly there will be a number of unintended consequences which will likely impact both the secured and unsecured lending sector. Most notably, any detrimental impact in income will inevitably affect those families struggling to manage their financial commitments and could inevitably result in some consumers resorting to debt. 

Meanwhile, private landlords hit by the restriction on personal tax relief, that allows them to off-set mortgage interest payments against the associated rental income will also be affected. Those landlords with affordability problems may be forced into arrears as they struggle to make up the shortfall that the personal tax relief allowance may have previously cushioned.  Whilst, some landlords may chose to pass-on the cost to their tenants by increasing rental payments, which in turn will put greater financial pressure on those families reliant on affordable rental housing.

Whilst a number of the changes announced in last week’s budget will not be implemented immediately, it is likely that it will not be long before the unintended consequences of the latest budget measures become reality for many.  Those in the lending sector would be well advised to have in place measures for ensuring the early identification of those customers in genuine financial difficultly, as identifying the “can’t pay’s” from the “won’t pays” and subsequently taking the most suitable and commercial recovery approach becomes more crucial than ever. 

Finally, with the spectre of financial mis-selling claims fuelled by claims management companies looming large in the retail financial sector, could there be some light relief for banks and building societies in the Chancellor’s commitment to introduce further regulation of these organisations, particularly their intrusive way of attracting claims through dubious direct marketing campaigns?