Budget checklist: What to expect

Click to follow
The Independent Online

SURE THING

Duties

Current situation

The duty on spirits has been frozen for many years, and wine duty has risen only slowly, much to the annoyance of the brewing industry. Raising the cost of alcohol and tobacco is usually a "no brainer" for a Chancellor, even in a good year. Only the prevalence of smuggling seems to be a deterrent to Mr Darling imposing some swingeing increases aimed at reducing binge drinking, lager loutery and other antisocial behaviour.

What to expect

With Gordon Brown having already fixed the 2008-09 income tax rates in his last Budget, it is taxes on spending that give Mr Darling some room to make his own mark. The brewers have long claimed to have been relatively disadvantaged and claim that the significant increase in drink-related bad behaviour, especially among females, can be sourced to wines and spirits. It seems Mr Darling has listened to them. Expect big rises in duties on stronger alcoholic drinks.

Business tax

Current situation

After years when both Tory and Labour chancellors sought to match the ultra-competitive rates set in places such as Ireland, the rate is down to 30 per cent. Last year Mr Brown pre-announced a cut to 28 per cent effective from April (though the net yield to the Exchequer will be largely unaltered because of reductions in capital allowances). Even though the UK's rate looks good against those of most other major economies, the rate in Ireland stands at a tempting 12.5 per cent. Even Germany now has a slightly lower rate than Britain.

What to expect

A cut in the main rate, as scheduled, plus even more scrapping of outdated allowances and complications, all in the name of Mr Darling's mission to simplify the tax system. Longer term, the pressure from companies threatening to decamp elsewhere – "tax competition" – should see the rate driven lower whoever is at number 11. However the separate small companies rate is set to rise to 21 per cent this April, and 22 per cent in April 2009. There has been some evidence of people abusing that tax rate.

Spending

Current situation

The Comprehensive Spending Review, presented with the pre-Budget report last autumn, was supposed to give government departments certainty about their budgets. The post-2001 election splurge is well and truly over, with overall public expenditure planned to rise by 2.1 per cent a year in real terms over the next three years, half the rate during Gordon Brown's attempts to save the NHS.

What to expect

Little change. Demands on the public purse are never-ending, and will grow more intense the nearer we get to a general election. Special factors, such as the armed forces' presence in Iraq and Afghanistan, may well nudge the defence budget up a little, but the Prime Minister showed himself ready to face down the military and his own Defence Secretary on this issue before, almost to the point where Des Browne considered resignation.

REAL CONTENDER

Borrowing

Current situation

After some bumper tax receipts in January, the Government seems likely to come in on target for its borrowing this year, or even below the £38bn mark, albeit that that target was conveniently raised in the pre-Budget report. Next year is more difficult. Given the squeeze on corporate profits that will come from a triple whammy of increased energy costs, the credit squeeze and lower demand, predictions of £50bn in corporation tax revenues in 2008-09 seem a little fanciful. For 2008-09 Mr Brown forecast borrowing of £30bn. This was revised up to £36bn by Mr Darling in the pre-Budget report, and this target could well be pushed up again.

What to expect

Most independent observers see an additional gap of around £8bn opening up between government receipts and expenditure, assuming a relatively mild downturn. Depending on how it juggles the numbers and whatever the heroic assumptions he makes about the economy growing, Mr Darling will probably announce increased borrowing today. Many experts see £42bn as a realistic estimate for 2008-09, with the public deficit topping out at £50bn in 2009-10 – equal to its levels in the last recession, though the economy is much bigger now. Asset sales might help to bridge the gap as well.

Child poverty

Current situation

The Government's stated aim is to halve child poverty by 2010 and abolish it by 2020. The Treasury Select Committee is the latest body to cast doubt on th e likelihood of the Government achieving the first goal without truly radical changes to policy, which are unlikely. However the Chancellor won't want to go down in history as the man who flunked this test, and will probably try to find a way of putting some more cash into schemes such as Sure Start.

What to expect

The Schools Secretary (and widely tipped future chancellor) Ed Balls and the Pensions Secretary James Purnell are believed to be among cabinet ministers worried about the Government breaking a key promise. They may have to make do with some relatively modest improvements in welfare benefits and measures to combat fuel poverty such as the much-trailed order to the energy companies to stop penal charging for fuel bought on pre-pay meters. Gordon Brown raised hopes that action would be taken when he told Labour's spring conference that poverty was a "scar that demeans Britain". But ministers are playing down expectations by talking up the 2020 target rather than the interim one.

Capital Gains

Current situation

After much controversy, drift and a few U-turns, Mr Darling's proposals on altering capital gains tax (CGT) and the tax treatment of non-doms seem more or less settled. The new "simplified" 18 per cent CGT rate should be introduced, with the abolition of taper relief and indexation allowances and £1m entrepreneurs' relief. The seals also seem set on the £30,000 non-doms levy. Even so, the shambolic nature of the reforms makes many wonder if this really will be the last word.

What to expect

Rumours persist that Mr Darling may introduce yet more tweaks to his proposals. One idea being floated is to tier the £30,000 non-doms fee by reference to their assets or income, though this "prying" would probably upset the non-doms even more. Whatever Mr Darling does will need the approval of the US authorities, which he seems confident of winning.

OUTSIDE CHANCE

Growth

Current Situation

The UK economy grew by a perfectly respectable 3.1 per cent in 2007, the fastest of any G7 nation. However, the outlook now is not so good, and in the pre-Budget report last year Mr Darling revised his growth forecast for 2008 down, from a range of 2.25 per cent to 2.5 per cent being replaced by a 2 per cent to 2.5 per cent prediction. Mr Darling says growth will be back on trend in 2009, at 2.5 to 3 per cent. Most independent observers are pessimistic about that.

What to expect

Whether it's realistic or not, Mr Darling will probably have to stick to his relatively optimistic projections and assume that the UK will rapidly bounce back in 2009 and 2010 – just in order to make his sums add up and ensure he stays within the "golden rule". Even so, the Institute for Fiscal Studies expects public sector net debt to hit the Government's ceiling of 40 per cent of national income in 2009-10 and to rise to 41.2 per cent by 2012-13.

Environment

Current situation

A riot of different regimes litter the tax system, sending no coherent message out to polluters. There's fuel duty, vehicle excise duty, aviation fuel duty (or lack of it), the climate change levy, landfill tax, aggregates levy, air passenger duty ... a legacy of successive chancellors creating new "nice little earners" under the guise of helping the planet. All parties agree on the need for more green taxes; they differ violently on the most practical way to save the world.

What to expect

Mr Darling is an avowed pragmatist, and is wary of green taxes because they tend to be regressive. Therefore we can indeed expect some individual tax changes, such as tax breaks for biofuels, a higher "showroom tax" on big cars, reduced mileage allowances for business use, moving to a flight-based tax rather than a passenger one, and a 2p rise in fuel duty – though some or all of these may be postponed, given rising inflation and hostile public opinion. However there will be no attempt to declare, for example, a rule whereby increases in green taxes are matched by cuts in income tax, as the Conservatives propose. A plastic bag tax is a wild card.

Inheritance

Current situation

Mr Darling effectively doubled the IHT allowance for most people to £500,000 by introducing transferable nil rate bands for spouses and civil partners effective from last October. He announced this as an election-winning measure last autumn, having watched the Conservatives boost their poll ratings with a very similar idea. Even so, house prices have trebled since 1997, and Mr Darling could do even more to uprate the allowances to take into account this fact of financial life.

What to expect

Mr Darling is unlikely to want to upset the middle classes by revisiting this proposal, so those inheriting semis in London will now no longer be regarded as qualifying you for the super-rich category. The slowdown in the housing market will relieve the pressure on him to uprate the allowance still further. On the other hand, were he minded to, though, at comparatively little cost (because IHT yields so little) he could make more symbolic cuts in a deeply unpopular tax. So there's a chance he could extend the exemptions to unmarried heterosexual couples or siblings who have lived together for along time.

LONG SHOT

Income Tax

Current situation

Abolition of the 10p rate and a cut in the basic rate from 22 per cent to 20 per cent are already planned and in hand for the new tax year starting in April. The raising of the national insurance contribution limit to harmonise with the starting point for the 40 per cent income tax band is also coming. These were some of the cornerstones of Mr Brown's final Budget last spring, and are likely to be sacrosanct. Most taxpayers won't see much net difference.

What to expect

The Government could reform national insurance yet again with the effect of raising even more via this tax – effectively an income tax in all but name. However the fragile state of household finances and the economy as a whole will probably stay Mr Darling's hand. He would not want to make New Labour once again the party of high tax; after all, some 48 per cent of the national proceeds of growth over the next five years will be going in tax, against 45 per cent under Blair and 30 per cent under the Tories.

Stamp duty

Current situation

Stamp duty kicks in at 1 per cent for properties worth more than £125,000. It was increased by £5,000 in March 2006. Only 40 per cent of first-time buyers now pay that rate, and the housing lobby has been asking for them to be helped by a cut in stamp duty. The average first-time buyer now pays £157,000 to get on the property ladder, so the threshold would have to raised significantly to be of relevance. Stamp duty raised £15bn last year, almost as much as capital gains tax, inheritance tax and alcohol duties combined.

What to expect

The Chancellor may well take the view that the decline in house prices will help first-time buyers more than any amelioration in stamp duty. He might also echo the view of many economists that reductions in stamp duty tend to help property sellers as much as those buying a home, and, even with recent weakness, the real-estate market is still at or near its peak, at which point it would be eccentric to inflate it further. "Kite marking" of mortgage-backed securities to revive a frozen secondary market may be a more pressing imperative.

VAT

Current situation

The 17.5 per cent rate hasn't been altered since 1991, when Norman Lamont was Chancellor. VAT is now on the low side by comparison with our European neighbours, but neither is that a terribly compelling reason for taking the politically charged decision to raise it. Mr Darling could however move on some of the zero- or low-rated items, ironically including the 5 per cent rate on domestic fuel won by Labour in a famous parliamentary victory against the Major government in 1994.

What to expect

Little or no change. If Mr Darling were to raise VAT it would be a truly bold move, but much against his progressive instincts and usually cautious habits. If he were to go for a rise, with all the political damage that would do and the adverse impact it would have on inflation and the economy, it would be a certain sign that the public finances are in very serious difficulty. He might want to save that emergency measure up for another time.

Comments