| Items | What is expected | Comment |
|---|
| | | |
| The economy and public finances | |
| Economy | Alistair Darling will update his forecasts from December’s pre-Budget report. Even though he downgraded his 2008 growth forecast to between 2 per cent and 2.5 per cent, independent economists believe 1.5 per cent to 2 per cent is more realistic. The 2009 forecast of 2.5 per cent to 3 per cent growth also appears bullish to those outside the Treasury. | Mr Darling will want to adopt close to consensus forecasts. He will downgrade the mid point of his 2008 growth forecast to 2 per cent and for 2009 to around 2.5 per cent. These are still relatively optimistic and leave him at risk of further uncomfortable downgrades in future |
| Tax revenues | January’s buoyant tax revenues put Mr Darling pretty much on track to meet his latest 2007-08 revenue forecasts. Revenues will still be lower than he predicted in last year’s Budget, and he will announce further downgrades for future years | The outlook appears difficult and independent economic commentators think Mr Darling’s longer-term revenue forecasts are too optimistic for corporate tax and stamp duty. They want to see genuine caution in revenue forecasts |
| Public expenditure | Three-year public expenditure plans were set in October for the years 2008-09 to 2010-11. These will remain largely fixed, although tight public finances mean the Treasury will be tempted to pull the same trick as it did last year when a £2bn underspend from one year was seized back by the Exchequer. Public spending is set to grow at 2.1 per cent above inflation every year | The spending totals cannot be changed easily since they are much tighter than departments are used to and are supposed to be fixed for three years |
| Public borrowing | The chancellor will update his borrowing forecasts, which showed public borrowing falling from £38bn in 2007-08 to £25bn in 2011-12. Again, these forecasts are likely to deteriorate a little | Mr Darling is likely to be close to his latest forecasts for 2007-08 but will have to accept higher borrowing in the years to come as the economy slows |
| Fiscal rules | Mr Darling will stick to the fiscal rules he inherited from Gordon Brown, even though few people pay much attention any longer. He will say Northern Rock’s debt can be ignored because it is temporary | Sticking to rules, however flawed, is likely to appear easier than attempting to define more sensible new rules. Mr Darling has shown no signs of the courage needed for change |
| Budget judgment | The Budget will be close to neutral, with small tax rises giving a little more room for manoeuvre in future years | Tighter fiscal policy is at odds with loosening monetary policy, but there is no room for US style tax cuts in Britain |
| Personal Taxes | |
| Income tax | Income tax is already being changed radically in April. In future there will be two rates: a 20 per cent basic rate and a 40 per cent higher rate. The allowances and thresholds have already been set for April. No further changes are likely | However bad the public finances, Mr Darling will not want to raise income tax. He will want to see how the new income tax rates bed down first before considering any further changes |
| National insurance | The rates and thresholds have been set in last year’s Budget and the pre-Budget report. The upper earnings limit is set to rise faster than inflation, forcing richer individuals to pay a total £1bn more in the next financial year | Contributions are still separate from income tax, but less so. The upper earnings limit will be aligned with income tax higher-rate threshold by April 2009. Full integration is possible but unlikely |
| Non-domiciled residents | More clarification of the new ‘non-dom’ tax regime is likely. The Treasury will probably keep the main £30,000 charge, make it fit with the US tax system and postpone some of the other changes proposed by HMRC | The issue will not go away and will be a test of Mr Darling’s commitment to fairness compared with the worries that the changes will harm Britain’s economy |
| Capital gains tax | Mr Darling is likely to introduce a concession for the insurance industry on bonds, which will become uncompetitive for higher-rate taxpayers on the introduction of the 18 per cent CGT rate | The government is intent on seeing the CGT changes through and now feels it has bought off most of the protests from business after its modifications and the relief for entrepreneurs announced in January |
| Value added tax | No big change is likely. There will be some uncontroversial VAT simplification | This is the only tax that is not undergoing radical change and while it would be an obvious money raiser, it is unlikely to be touched. |
| Tax credits | Alistair Darling is in all sorts of trouble trying to meet the government’s ambition of halving child poverty by 2010. He is likely to increase the generosity of tax credits and sort out some anomalies in this Budget, but not announce big changes to the administration of the credits which cause huge problems for so many poor families | The government’s failure to meet its child poverty reduction targets puts Mr Darling under some pressure to raise the values of tax credits, but he does not have the cash to do much. There is increasing pressure for him to ditch the 2003 reforms, which generated huge financial uncertainty, overpayments and clawbacks for about 40 per cent of recipients, and return to fixed payments |
| Property stamp duty | With property prices stagnating and first-time buyers priced out of the market, Mr Darling could change some of the thresholds for stamp duty. He will clamp down on new avoidance schemes for £1m-plus properties | The Conservatives want lower stamp duty for first-time buyers, but this complex change is one Tory tax policy idea Mr Darling is unlikely to copy. Stamp duty raises about £8bn a year, much too much for wholesale reform |
| Inheritance tax | The PBR announced a £1bn change to inheritance tax, allowing transferable tax allowances between married couples and civil partners. No further changes are expected | The PBR took some of the heat out of inheritance tax, but the tax remains unpopular and the Conservatives want to see the threshold raised to £1m. This is likely to remain a dividing line between political parties |
| Savings taxation | Simplification of Individual Savings Accounts, raising the limit to £7,200 and the cash element to £3,600 is being introduced in April | Mr Darling is likely to raise the limits further in 2009 |
| Excise duties | Mr Darling needs to set the duties for alcohol, tobacco and road fuel. He is expected to announce that a 2p rise in fuel duties will be delayed by six months to avoid angering motorists, who are bearing the cost of rising oil prices | Fuel protests have been gathering pace but the government needs the money so badly it is likely to keep the tax increases in place. Big rises in petrol duty, as in the late 1990s are highly unlikely, however |
| Vehicle excise duty | Mr Brown made the duty more closely related to vehicle emissions in last year’s Budget. He announced duty rates for the next three years | Taking the results of the King review on low-carbon cars, new low-polluting cars are likely to be subject to even lower rates with higher rates for new gas guzzlers. The government wants to change the way people buy cars |
| Pensions | The level of the basic state pension has already been set for 2008-09, as have the rates of pension credit | The chancellor is not expected to find extra money for pensioners following the government’s plans to link the state pension to earnings in the next decade |
| Corporate taxes | |
| Corporation tax | After last year’s rate cut to 28 per cent, the rise in small business rates and reductions in the generosity of allowances, this year will be less dramatic. Mr Darling may revisit the cuts in capital allowances on industrial buildings | The taxation of foreign profits is an issue that needs urgent attention and this Budget might be the right moment for another consultation, if the Treasury has not been too busy recently to produce one. The chancellor is under pressure to allow companies to carry back losses for three years |
| Small businesses | Mr Darling is under great pressure for concessions to the draft legislation on income shifting and is likely to yield to some of the complaints | The plans are causing consternation among small family companies which say the rules would be terribly complex |
| Tax avoidance | Mr Darling will announce the tax loopholes he believes companies are exploiting and which damage the tax system. He will introduce principle based anti-avoidance measures on financial products | Companies’ arguments that the chancellor is using anti-avoidance measures as a device to increase their tax burden will fall on deaf ears as Mr Darling is likely to introduce another raft of measures |
| Gambling | Mr Darling might have some cheer for the bingo industry that has been suffering from the smoking ban | Moving bingo taxation to a gross profits basis would be in line with recent gambling tax changes |
| Other | | |
| HMRC powers | HMRC wants new powers including the right to go to business premises unannounced and it wants to be more prescriptive about record-keeping. Less controversially, it wants the concept of ‘reasonable care’ in deciding penalties | If Mr Darling opts for draconian powers, this could be the next source of friction between government and business |
| Housing finance | The chancellor will announce a new ‘gold standard’ for wholesale mortgage financing aimed at easing banks’ funding pressures. He will also announce changes to government debt financing to help encourage long-term, fixed-rate mortgages | The industry is divided on whether these measures will work. It worries that they will exacerbate borrowing difficulties for lower quality mortgagors |
| Green taxes | Mr Darling is likely to introduce a raft of new green measures: a plastic bag tax, incentives for carbon capture, petrol duty rises, new vehicle excise duty rates, tightening the renewables obligation for electricity suppliers, and changes to company car taxation | This is Mr Darling’s opportunity to set a new direction, raising green taxes and making concessions in other areas. It is the most politically palatablearea for tax increases since the other main parties also want to increase green taxation |
| Fuel poverty | Mr Darling will introduce new regulations to force utility companies to charge the same rate for pre-payment meters. It also wants to announce a deal through which the companies will undertake to help the poor | The pressure on electricity providers to change business practices might win some concessions but they might call his bluff, believing a windfall tax is not a credible threat |
| Brownfield land | New incentives for people to use such land will be introduced | Mr Darling hopes this will offset the slowdown in house building as the economy sputters |
| Tax simplification | Mr Darling will report on how his plans for tax simplification are coming along | He is also under some pressure from experts to define what he means by tax simplification |
| Financial reporting | The chancellor will announce a delay in introducing international financial reporting standards to government | The defence and health departments are not ready and the delay will flatter debt on the government’s books for another year |
UK Budget 2008 - Comment
