Jeremy Warner: Now for the Chancellor's final conjuring trick: the famous disappearing tax cut

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The Independent Online

A business-friendly Budget? After the deluge of complaint the Chancellor has been getting from business lobby groups over Britain's growing lack of competitiveness, that's certainly the way he wanted it to be seen.

To the extent that the Treasury hasn't delivered a fresh kick in the goolies to business, the Budget lived up to its promise. Up to a point, the Chancellor seems to have been listening, and thereby taken on board at least some of the criticisms.

Yet it is hard to get away from the fact that in the round, the package of measures announced yesterday are at best only broadly neutral for business, if not marginally negative, and I'm not altogether sure they'll produce the boost to investment and growth the Treasury's own modelling suggests.

Much depends on where you are sitting. The 2p in the pound cut in the main rate of corporation tax is good for big business, and in headline terms at least, starts to make Britain once again look competitive with European rivals.

Companies that have been threatening to relocate because of an uncompetitive main rate of corporation tax may now be persuaded to think again. The Chancellor was on the other hand fairly upfront in conceding this was a fiscally neutral Budget. With business taxation it may even be slightly negative.

The reduction in the tax burden brought about by the cut in the main rate of corporation tax is entirely cancelled out by a matching reduction in capital allowances on plant and machinery. There are also a range of other measures which in effect increase the tax burden on business.

The small companies rate of corporation tax is increased to 22 per cent, this supposedly to address the problem of incorporation by the self-employed in order to avoid paying income tax and national insurance. For genuine small businesses, there is to be an offsetting annual investment allowance of £50,000, though how many will actually make use of it is open to question.

A range of other allowances, including the ability to depreciate industrial buildings, are abolished or reduced, and in another big plus to the Treasury - which you won't be surprised to hear is being spun as a positive for business because it ought to release more property on to the market - the current exemption that vacant property enjoys from business rates is being severely cut back.

Oh, and you can forget simplification. As far as I can see, the landscape for business taxation just got a whole lot more complicated.

The upshot is that the Budget is broadly positive for big business, but probably negative for small business. It's bad if you are a low-profit company with lots of capital equipment, but a bit better for service-orientated industries. Highly profitable manufacturers such as Rolls Royce should be net beneficiaries. Yet in a downturn with profits under pressure, they would fare rather worse.

Much the same analysis can be applied to the changes in personal taxation. They look astute politically, but in reality are no more than a cynical rebalancing exercise.

News that the Chancellor is cutting the basic rate of income tax by 2p in the pound and eventually raising the threshold for the higher rate to £43,000 had one poor gentleman on the BBC's post-Budget analysis punching the air with joy at the prospect of being taken out of the higher rate of tax bracket. Unfortunately for him, once the harmonisation of national insurance with the upper rate threshold is taken into account, he may be no better off.

Lower down the income scale, what the taxpayer gains from the cut in the basic rate he loses from the abolition of the 10 per cent tax band, a lower rate that was once upon a time introduced by the Chancellor himself in an attempt to improve the lot of the lower paid.

What's more, those who pay only the 10 per cent tax rate will end up net losers. The effect is nowhere near compensated for by improvements in tax credits, which in any case are administratively complex with quite poor levels of take-up among those entitled to them. No doubt there are some who benefit from these measures. In the round, however, it makes very little difference.

The best interpretation that can be put on the personal tax changes is that they do simplify things a bit. If the Chancellor's successor keeps driving in that direction, it ought in time to deliver a more transparent and easy to understand tax system.

On the public finances, the Chancellor is again taking risks. Contrary to expectations, he seems slightly to have relaxed the broad outline of the spending round. The forthcoming squeeze is not quite as bad as it was, while some spending departments, particularly education, come out of it well.

There's also more money for science and training. No one's going to object too loudly to that. Yet the caveat is the same as it was with the health service. Is this money likely to be spent wisely and productively? There's not a lot of evidence of it with the NHS, where more than half the extra money went into salary rises.

As it is, the Chancellor is forced to borrow some £8bn more over the next three years than he was anticipating only a few months back at the time of the pre-Budget report. What's more, all the numbers are again dependent on the economy delivering above consensus growth and the Chancellor achieving ambitious targets for efficiency improvements in the public sector.

Virtually every year since he's been Chancellor, Mr Brown has managed to confound the sceptics on his forecasting for the economy. Growth has consistently been higher than most outside forecasters thought. Yet the Chancellor has been less sure footed when it comes to forecasting the public finances. As the accompanying graphic demonstrates, government borrowing has routinely come in higher than originally predicted. Still, it won't be Mr Brown's problem for much longer, or at least, not directly. By the time it all goes belly up, Macavity won't be there.

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