Budgets are not what they used to be. Time was that Budget day was the platform for big announcements. Now, the pre-Budget report is increasingly used to signal significant tax and spending changes – December’s PBR contained £2bn of revenue-raising measures, principally via the increase in air passenger duty. Budgets themselves have become, well, dull.
But this year’s is very probably Gordon Brown’s last. Will he pull something out of the hat and surprise us all?
As far as the economy is concerned, there is little reason to change December’s sanguine forecast, given it is only a couple of months old. After GDP growth of 2.75 per cent in 2006, the Treasury should stick to its projection of a further acceleration to about 3 per cent this year, while inflation falls back to target.
Private forecasters are less optimistic about activity, expecting instead a slowdown as higher interest rates damp consumer spending and a cooling global economy brings last year’s export boom to a sudden halt. But the consensus is still for overall growth of a respectable, if unexciting, 2.5 per cent.
The chancellor will also confirm his preliminary judgement that the economic cycle ends this year. After the ups and downs of the past decade, output is once again on trend – or, in the jargon, the output gap is zero. The economy is currently neither too hot, nor too cold.
This is of more than passing interest to economists. It means that the chancellor will be able to say that his famous golden rule for the public finances – that current spending must be matched by current revenues over the cycle as a whole – has finally been met after the longstanding “will he, won’t he?” battle with naysayer commentators.
Some still argue that it will be a hollow victory in view of recent changes to the definition of the cycle. The back-dating of its start to 1997 had the effect of cutting the chancellor some slack at a time when it looked as if the rule would be broken. And it also means that the current cycle has been unusually long. Nevertheless, it makes for a rather neat ending to Mr Brown’s reign at the Treasury.
However, it also raises questions about the next cycle. Since the early 2000s, public spending has risen at a much faster rate than the economy as a whole. But without higher taxes, this leeway has been used up, particularly now that public debt has risen to within a few percentage points of its ceiling at 40 per cent of gross domestic product.
Consequently total public spending growth is slated to slow sharply over the next four years, to below the rate of growth of the economy, although we will probably have to wait for the Comprehensive Spending Review in the summer for details of the allocations to health, education, alleviation of child poverty, etc.
Even this projected squeeze on spending still leaves the public finances looking tight and although there is no immediate need to raise taxes, equally there is no scope to cut them.
Turning to tax, there is of course, likely to be the usual tweaking of tax plans, raising a bit more here to spend a bit more there. And there could well be moves around “green” taxes designed to encourage more environmentally friendly behaviour.
In the past decade, Mr Brown has fundamentally changed the tax landscape: the previously separate entities of the Inland Revenue and Customs and Excise have merged into Her Majesty’s Revenue and Customs, there has been a sustained campaign against “unacceptable” tax avoidance, the pensions system has been changed beyond recognition with the abolition of the dividend tax credit and last year’s “A-day” transformation and the tax system has been drafted in as part of the welfare state via the introduction of various tax credits.
The rapid pace of change and frequent introduction of new legislation (particularly on anti-avoidance) has increased dramatically the level of complexity of the tax system and also introduced an element of uncertainty, which many corporates find disconcerting. As a result, there is a growing volume of complaints from business in the UK about the tax system.
So can business expect good news in the Budget? Well, if business is hoping for any respite on anti-avoidance then no. It is almost certain that the budget will see the introduction of further targeted anti-avoidance schemes aimed at tax planning brought to HMRC’s attention through the Disclosure of Tax Avoidance Schemes regime.
Looking at some specifics, as mentioned earlier we are expecting moves around “green” taxes. An update on a consultation process around a new approach to penalties is likely too. We will also be looking out for an update on the “Varney Review of Links with Business”, in particular in the area of how a new approach to how HMRC deals with large businesses will affect those that it views as “low risk”.
However, business has been making more and more noise about the uncompetitiveness of the UK’s tax system with calls for a simplification of the regime and speculation that a cut in corporation tax could be on the cards.
Turning to areas more likely to affect individuals, legislation concerning accrued holiday pay is under review, so there may well be some sort of announcement on this. It will also be interesting to see if there are amendments to some of the sweeping changes to the tax treatment of pensions introduced on April 6 last year.
One of the main changes resulting from A-day was to increase the amount of tax free contributions that an individual could make to a personal pension to £215,000. Having seen the level of contributions made and the ensuing tax relief being given, it would not surprise us to see some restrictions applied to this generous allowance.
At the end of the day, there is little room for manoeuvre on the finances so anything given with one hand would likely be taken away with the other. But, if it was your last Budget, what would you do?
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