24 March 2010 Budget Report
What may the 2010 Budget bring?
When the Chancellor, Alistair Darling gets to his feet in the House of Commons - on 24 March - to present the final Budget before the next general election, he will be expected to present details on the government's plans to square a very round circle. How to reduce a vast public borrowing deficit, already running into the sort of numbers only pure mathematicians normally deal with (£178 billion for this year), while nurturing a still fragile economic recovery.
However Mr Darling dresses his statement, it will involve tax rises and spending cuts. True political debate will centre not on the principle of those rises and those cuts but on their timing.
One group of economists - 20 in number - expressed, in a recent letter to the Sunday Times, the importance of a more urgent reduction in the structural budget deficit than was set out in the pre-Budget Report of last December (Mr Darling promised a halving of the borrowing requirement in four years). No sooner was that communication received than a missive from 67 other economists landed on the desk of the Financial Times counselling the wisdom of delay: don't slash public spending until 2011 in order to support the weak recovery of the private sector (ONS estimates of GDP growth in the final quarter of 2009 heralded the end of recession but only by a feeble 0.1 per cent, revised upwards to an only less slightly feeble 0.3 per cent).
Timing; that's the only difference. There will have to be severe fiscal tightening, sooner or even sooner. The cuts, when they come in their full pomp and from the pen of whichever Chancellor, will be probably as deep as anything seen since the 1980s.
What we think we know about the Budget
Taking the 2009 pre-Budget Report as a framework guide to the Budget itself, the Chancellor may confirm a number of measures.
One of the major announcements in Alistair Darling's pre-Budget Report was the decision to raise employers' and employees' national insurance contributions. Employee, employer and self-employed NICs will rise by 0.5 per cent in April 2011on top of the 0.5 per cent increase announced in the 2008 pre-Budget Report.
There were changes to income tax as well, although they have been deferred. The point at which taxpayers are charged the 40 per cent rate of income tax is to be frozen in 2012/13 at its 2011/12 level, which means more people will be liable.
The £325,000 threshold for the inheritance tax is to remain in place for 2010/11.
To the relief of smaller firms, the Chancellor deferred the planned rise in the rate of small companies' corporation tax. The 1 per cent rise, from 21 to 22 per cent, has been held over for another year, remaining at 21 per cent in 2010/11.
Spending growth will slow to an average of 0.8 per cent a year between 2011 and 2015. Government contributions to public service pensions for teachers, councils, NHS and the civil service to be capped by 2012, and all public sector pay deals to be capped at 1 per cent for two years as from 2011.
Clues about what we don't know
Mr Darling has acknowledged the broader direction of the forthcoming Budget, even if he has remained tight-lipped on its details. In an Edinburgh speech, the Chancellor confirmed the imminence of spending reductions and of "fair tax rises, with the biggest burden falling on those who can most afford it."
Spending cuts
The Chancellor is keen, it is reported, to provide more specific plans about exactly how he intends to tackle the public deficit in order to reassure the bond investors who buy the gilts that fund the government's debt that the administration is serious about reducing its borrowing levels. In mid-February, jitters in the government debt market pushed the yield on the benchmark 10-year gilt to almost 4.1 per cent, a level that added significantly to the cost of the UK government's borrowing.
Just specific, however, Mr Darling will be about his plans may be tempered by the looming general election.
One independent think tank, the Institute for Fiscal Studies, estimated as necessary a three-year purging of £36 billion from various Whitehall departments, starting in 2011. Will the Chancellor be prepared to put such an exact and high figure on the cuts?
Income tax
With the higher rate income tax already set to rise to 50 pence in the pound, other tax measures aimed at very high earners may be on the cards.
Mr Darling could yet lower the threshold of the 50 per cent rate to incomes of £100,000 a year.
Anti-avoidance will probably loom large. There is a possible 32 per cent difference between income tax rates, at the higher level, and capital gains tax. The temptation for some taxpayers is to transform income into capital as a way of sidestepping the more onerous income tax charge. The Budget may set out more ways and means of controlling this.
Although there are pension tax relief anti-forestalling rules in place - to head off significant switching of funds to pension pots ahead of the arrival of the new, lower relief rates which will taper to as low as 20 per cent - the Chancellor may choose to amend these even further.
Capital gains tax
There may be leeway to increase CGT, currently at 18 per cent, to as much as 20 or 30 per cent. The Chancellor may soften the impact by raising the allowance threshold at which the charge becomes liable, perhaps to £25,000.
Corporation tax
Corporation tax for larger firms is 28 per cent. The Chancellor could propose reducing this by 3 per cent but, in return, make the rules on company losses more demanding. The scope that UK companies have for carrying forward losses against future profits is a broad, effectively indefinite one, extended, as it is, until they have accrued a similar sum in profits; imposing a time limit - maybe six years - may be an option.
VAT
The old 17.5 per cent rate of VAT returned on 1 January. But could the Chancellor actually raise VAT, perhaps to 20 per cent? Some business groups - not all - regard an extra VAT hike as preferable to the planned increase in NICs.
The Treasury may worry such a move would serve to fuel inflation, but with the Bank of England forecasting that rises in the cost of living are likely to drop back well below the government's 2 per cent target later in the year, that concern may not weigh so heavily.
VAT is the government's third largest source of finance. Raising VAT to 20 per cent would add a further £12 billion a year to the public coffers, the equivalent of a 3p in the pound hike in the basic rate of income tax.
