Those Budget leaks. Who should you believe?

Confused by all those Budget leaks in the weekend newspapers? Our Economics Editor, Diane Coyle, casts a cool eye over the predictions and spells out how the key Budget changes might really look.
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`Brown to tax middle-class child benefit' (Sunday Times)

The Chancellor has long been itching to claw back some middle-class benefits to finance improved help for the low-paid, and child benefit is at the top of his list. The Sunday Times reports that he will use the pounds 700m this would raise to increase the level of child benefit for the first-born by more than inflation, to sweeten the pill politically.

The catch is that many mothers have low pay or no pay and would not be liable for tax on the benefit in their own right. The Chancellor would need to get round the hurdle of independent taxation of husbands and wives in order to make a tax assessment based on family income. A return to joint taxation would mean a huge tax increase on working women and run into all kinds of obstacles such as how the Inland Revenue should treat cohabiting couples. It raises the awful spectre of tax inspectors in the bedroom. Could this Sunday Times story be a classic Treasury kite-flying exercise?

Mr Brown does, however, need to find around pounds 1bn to finance what we know will be the symbolic centrepiece of his Budget, the Working Families Tax Credit and Childcare Credit. This replacement for Family Credit is meant to help low-income families by making sure work pays.

It will take the form of a tax credit in the pay packet, although there will be an option for the woman in the household to receive it directly even if she is not the main earner.

The new Childcare Credit for eligible families is intended to make up, in cash terms, for the loss of the single-parents benefit. But it will be available to couples with children as well. Pre-Budget hints suggest as much as pounds 1bn extra will be found for a more generous package of tax and childcare credits for those in low-paid jobs. The measures are likely to be timed to coincide with the introduction of a national minimum wage, to ensure the Government is not simply subsidising mean employers.

This week could see a timetable for the introduction of a 15p or 10p starting rate of income tax as another encouragement to work. A related Budget measure to boost job creation was signalled by Martin Taylor, head of the tax and benefits task force. Employers' national insurance contributions currently jump in big steps at various levels of income, discouraging jobs that pay sums just above these steps. Mr Taylor has recommended a big increase in the lower limit for employers' NICs, to be paid for by a small rise in their contributions for higher earners.

`Brown pledges pounds 500m to NHS' (The Observer)

Even with public finances in healthy shape, thanks to higher tax revenues and tight control on government spending, Mr Brown will live up to his Iron Chancellor image by refusing to take the brakes off expenditure. But the Observer says that he is widely expected to find more money for priority needs, health and education.

The NHS got an extra pounds 300m to tide it over the winter, and both areas were allocated additional funds in last July's Budget. But the amounts the Chancellor can produce are still limited by his pledge to stick to his predecessor's spending totals for two years. Although these have frayed at the edges - thanks to New Deal spending financed from July's windfall tax on the privatised utilities, and a few extras paid for from the reserves - the broad outline will still be unchanged. The results of the Government's fundamental review of spending are due in the summer. A mammoth battle for funds is likely then but the Chancellor has indicated that he will set firm spending totals for a further three years after that.

`Brown to set museums free' (Independent on Sunday )

Every Budget also has room for some important gestures that are nevertheless relatively cheap in the grand scheme of things. Up to pounds 80m, partly financed from National Lottery Funds, will allow Mr Brown to declare it a Budget for the Arts. The Independent's campaign has helped create a vocal pre- Budget lobby for the arts. The film industry got some help last July. In November it was pensioners who felt the benefit of the Chancellor's generosity.

Another beneficiary this week is expected to be hi-tech companies. One possible boost for entrepreneurs would allow investors to offset losses on shares in such companies against other tax due. Another possibility is the introduction of an allowance against corporation tax for research and development spending by certain types of business.

`Brown plans Budget to keep Britain on course for euro' (Sunday Telegraph)

As well as rehearsing the plans for extra money for health and education and following its own obsessive interest with the single European currency, the Sunday Telegraph focuses on measures to bring the British economy closer into line with its continental neighbours. The Budget does take place days before a key meeting of European finance ministers in York. The Telegraph suggests that one strand of Euro policy is having a tough Budget that will help keep the pressure off the Bank of England to raise interest rates again, in the hope of getting the pound down to a more comfortable level.

Just as important will be structural measures like making the British housing market more like those in Germany and France, where owner-occupation rates and levels of mortgage debt are lower. In July Mr Brown announced a further restriction in the rate at which mortgage interest tax relief is available to 10 per cent from 1 April 1998. He clearly means to get rid of it altogether. He could restrict it further or abolish it, saving the Treasury more than pounds 2bn a year.

`Luxury company cars face tax hike' (Mail on Sunday)

The Mail says Mr Brown is likely to remove the pounds 80,000 ceiling at which directors pay 35per cent tax on Rolls-Royces, Bentleys and Aston Martins.

The tax treatment of company cars has become steadily tougher since 1993, and users are now taxed on 35 per cent of the list price of the car, with reductions linked to business mileage and the age of the vehicle.

As an environmental measure, the mileage allowances are widely expected to be reduced or abolished.

The Budget will also confirm a pre-announced environmental measure, increases in petrol duty above inflation. In July the Chancellor raised vehicle excise duty by pounds 5 to pounds 150 for cars, but he could opt for a further rise. However, this looks like being one of the few green measures on tomorrow.

What other measures will there be?

Individual Savings Accounts: Government proposals for the replacement for tax-free Tessas and Peps, which were set out in November, will be modified as a result of the uproar they caused in the financial-services industry.

A planned pounds 50,000 lifetime limit on the amount that can be saved in an ISA will probably be scrapped, and rules for the amount transferable from Peps and Tessas could be eased. ISAs are due to come into force in April 1999.

Crackdown on tax avoidance:Clearly signalled in July, in the November Pre-Budget Report, and in a move just over a week ago to close a specific loophole relating to offshore trusts, there will be more anti-avoidance measures. Accountants are bracing themselves for scores or even hundreds of specific clauses, and perhaps also a general anti-avoidance proposal outlawing any transaction whose purpose is simply to avoid tax. For companies and the wealthy, this could be the big news tomorrow.

Company taxation: The Chancellor will introduce reforms to corporation tax pre-announced in November. Advance corporation tax is to be abolished, and big companies will move to a system of quarterly tax payments (rather than payment a year in arrears).

The rate of corporation tax is also to be reduced to 30 per cent, following a cut to 31 per cent in the July Budget.

In the long run the new system should encourage investment, but companies have complained that their cashflow will be hit by bringing forward their tax payments. Mr Brown might make some extra concessions to help small and medium-sized companies over this cashflow hurdle.

Pre-announced tax rises: In his first Budget last July Mr Brown announced the ending of income tax relief for private medical insurance; a further increase in real terms rises in tobacco duties; a higher rate of stamp duty on house sales above pounds 250,000; and the phased withdrawal of tax relief for profit-related pay schemes.

Altogether, these add up to a pre-programmed tax increase of pounds 3.6bn in1998/99, equivalent to about 2p on the basic rate of income.

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