The Budget checklist: what to expect
George Osborne will be unveiling his plans for the country's finances today. Ben Chu outlines some of the things you should look out for
The job of forecasting economic growth rates has been contracted out from the Treasury to the Office for Budget Responsibility (OBR), led by Robert Chote. The OBR has downgraded its growth forecast four times since George Osborne's emergency Budget in June 2010. Mr Chote unveiled a hefty series of downgrades at the Autumn Statement last November. Growth for 2012 was slashed from 2.5 per cent to just 0.7 per cent. But uncertainty abounds over what the OBR will say about the economic outlook this time around. Since last November the Office for National Statistics has estimated that the UK economy shrank by 0.2 per cent in the third quarter of 2011. But a host of businesses surveys since the turn of the year have pointed to an improvement in activity, bolstering confidence that Britain will avoid a double-dip recession. Most analysts do not expect the OBR to downgrade its growth forecast for 2012. It may even raise it slightly. But the OBR's longer-term outlook is still rosier than the City consensus and might be brought closer into line.
The other job of the OBR is to say whether or not the Government is on course to meet its self-imposed "fiscal mandate" – namely, balancing the current expenditure Budget over a rolling, five-year horizon and ensuring that public debt as a share of GDP is falling by the end of the present Parliament. The chances of the Government hitting these targets hinges on the economic outlook. Weaker growth generally means weaker tax revenues and more borrowing. Yet despite the weakening of the economy over the past year, revenues have held up very well. Public borrowing for 2011-12 is on course to come in around £9bn less than the £127bn the OBR forecast in November. So there is also uncertainty about what the OBR will forecast for public borrowing this year. Some analysts are also predicting that the OBR will cut its borrowing forecasts for future years. But even if the OBR does deliver this good news, the Chancellor, who is under pressure from credit ratings agencies over the UK's AAA status, is highly unlikely to announce plans to spend the savings.
Movement at the top and the bottom is in store. The Liberal Democrats have a longstanding objective of taking anyone who earns less than £10,000 out of income tax altogether. They have been making progress. The Chancellor raised the income tax threshold by £1,000 to £7,475 in the 2010 Budget. And it is set to rise to £8,105 next month. Further progress towards this goal is expected today, with the Chancellor set to announce that the allowance will rise to £9,000 in April 2013. Yet the Treasury has also been sending out strong signals that the 50p tax rate on incomes above £150,000 a year will be reduced to 45p in 2013 and 40p in 2014. Critics argue that the tax is more trouble than it's worth, since it discourages effort from high earners and simply results in people avoiding the tax. The Treasury originally said that the new tax would bring in around £2.7bn in 2011-12. A study, due to be published today, will show how much revenue it has actually produced, although some experts have argued that there is not yet enough data to reach a firm conclusion on the effectiveness of the tax. The Chancellor is also expected to announce a limit on the total amount of tax relief and allowances that wealthy individuals can claim on their income, which the Liberal Democrats have dubbed an effective "tycoon tax". There has also been speculation that the Chancellor will announce a further cut in the amount that wealthy individuals can pay into their pensions tax-free each year. In 2010 the Chancellor cut the allowance from £255,000 to £50,000.
Fuel tax is due to rise by 3p per litre in August, postponed from January. Pressure on the Chancellor from the motoring lobby to postpone again has been strong. But Mr Osborne's aides insisted last month that the Chancellor simply cannot afford to do so. The Liberal Democrats' proposals for a "mansion tax" on homes worth more than £2m have been rebuffed. But the Chancellor will also announce plans for a "General Anti-Abuse Rule", which will be designed to clamp down on legal, but highly aggressive, tax-avoidance schemes. A particular target is the practice of people transferring the ownership of their homes to offshore companies so they can avoid stamp duty. Corporation tax will fall to 25 per cent in 2012-13, and it is scheduled to fall to 23 per cent by the end of this Parliament. It is possible the Chancellor will announce another 1 per cent reduction, but this would be expensive, costing the Treasury around £800m.
Child benefit is due to be withdrawn from families with a higher-rate taxpayer (those earning more than £43,000 per year) from January 2013, saving the Government £2.4bn a year. But critics have pointed out that a family with two adults earning just under £43,000 each (and a combined income of more than £80,000) would keep the benefit, whereas a family with a single earner with an income of slightly more than £43,000 would lose it. The Government has signalled that it accepts this is unfair. The Chancellor is expected to take action to mitigate the financial impact of the benefits removal on some families, possibly by tapering the withdrawal. There have also been suggestions that Mr Osborne might also announce a consultation on providing further help for parents in meeting the soaring costs of child care.
The Chancellor is expected to bring forward the scrapping of national pay rates for the public sector by one year to 2012-13, something he argues will stimulate growth in regions outside the South-east. There is also pressure for action on youth unemployment. More than one in five 16 to 24-year-olds – 1.042 million – are looking for work, and the Chancellor is under growing pressure to do something to help this group. In his last Budget, Mr Osborne announced 50,000 Government-sponsored apprenticeships. There have been calls recently for the Chancellor to reduce the national insurance contributions employers must make for people in this age group, to encourage hiring.
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