FT briefing: Pre-Budget report

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FT.com explains the role of the pre-Budget report and what we might expect from Gordon Brown on December 5.

What is the pre-Budget report?
Hasn’t there always been an autumn statement?
What are the likely themes?
What policies are likely to be announced?
What is unlikely to feature?
What is the state of the public finances?

What is the pre-Budget report?

The chancellor has presented a pre-Budget report since the autumn of 1997, when the current Labour government was voted into power. The PBR, as it is known in Westminster, provides the chancellor with an additional opportunity to the spring Budget to update parliament and the country on the state of the economy.

The pre-Budget report acts as a preview to the actual Budget, enabling feedback on proposals to the Treasury. But ideas laid down in the pre-Budget statement do not necessarily find their way into the Budget document.

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But hasn’t there always been an autumn financial statement?

Traditionally, yes. In the past, the government gave an autumn statement on public spending figures and a Budget for taxation in the spring. In 1993, the Conservative chancellor Norman Lamont combined the two statements into a unified Budget intended to be delivered late in the year. The relative merits of different systems are periodically debated, but broadly the movement is towards simplification and greater transparency.

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What themes will govern the 2005 pre-Budget report?

Last year’s report would have been prepared with the forthcoming election in mind, with little to upset voters. Cynics might therefore expect the 2005 PBR to take advantage of the length of time before the next poll to introduce the electorate to some unpalatable policies.

With the public finances said by many economists to be sporting a £10bn structural shortfall, it may be tempting for Mr Brown to try and increase his tax take. However, it is likely the chancellor will delay delivering any significant tax changes ahead of the Comprehensive Spending Review due in 2007.

Nevertheless, the health of the economy and its impact on the public finances will be an important feature of the report. Mr Brown will accept that the UK economy is growing slower than he had previously forecast, but he may once again point to the the debilitating effect of high oil prices and weak demand from abroad as the main causes of underperformance.

“The Britain I want is a Britain of enterprise and aspiration,” wrote Mr Brown recently in the FT, a theme he will return to in the PBR. The chancellor believes it is imperative for the UK to bolster its entrepreneurial credentials if the nation is to prosper under increased globalisation. Talk of the need to improve productivity and incentives to boost research and development may also feature.

Mr Brown could also mention the need to take measures to increase the housing supply, in response to a report for the Treasury by Kate Barker, an economist, who found that developers were not building as many homes as in the past. The government believes that the unaffordability of housing for lower paid workers reduces the efficiency of the jobs market.

One theme particularly close to the Treasury’s heart of late has been tax avoidance. Mr Brown may discuss the need to increase corporation tax receipts by further choking-off schemes by which accountants help their clients to avoid tax using legal loopholes. In view of his wish to encourage start-ups, there may be news on easing the tax burden on smaller companies.

Mr Brown likes to portray himself as a family friendly chancellor and there may be news of more help for poorer families and those working who have children. A statement on the tax credits system should not be ruled out.

Public sector efficiency is likely to make an appearance. Despite the recent back bench rebellion leading to the first defeat of his premiership, Tony Blair says he is determined to press ahead with reforms designed to ensure public services deliver more bang for the taxpayer’s buck. Gordon Brown says he agrees and we may hear the chancellor express his wholehearted support for the prime minister’s campaign.

Finally, the PBR, which has come to be known as the Green Budget in a parliamentary allusion to its use as a document for discussion, may offer some news on environmental taxes and proposals to encourage alternative forms of energy production.

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What policies is the chancellor likely to announce?

We can be certain of at least one of the policies the chancellor will reveal on December 5. In his article in the FT on Nov 14, Mr Brown said he would “set out further measures to boost enterprise, including details of new enterprise scholarships to allow British students to learn from the best of enterprise in the US.”

And we also know the PBR will be accompanied by a report from Professor Martin Cave that recommends the radio spectrum should be run on a more commercial basis. Professor Cave will have told Mr Brown that the government bodies should face sharper economic incentives to make efficient use of the spectrum, a policy that should result in further income for the exchequer as the public sector sells spectrum it hardly uses.

One tax raising measure the chancellor might introduce is unlikely to be welcomed by the construction sector. A land development tax would allow the treasury to receive some of the increase in the value of land once it has been granted planning permission. Builders have warned that such a move contradicts the government’s policies for increasing the supply of housing.

Continuing the property theme, Mr Brown is expected to give more details on the possible introduction of Real Estate Investment Trusts: tax-efficient property vehicles that are designed to encourage investment in the property sector. The shares of many property companies have been rising in anticipation that Reits get the go-ahead.

Though the government may be loathe to risk alienating the business community, there are fears among the energy industry and its investors that the chancellor is eyeing the juicy profits being made on the back of the high oil price. A North-Sea windfall tax can’t be ruled out.

Rather than taking, Mr Brown may be in a giving mood. It is possible he will promise to bail out local authorities. They have warned council taxes might rise by 10 per cent if they don’t receive more aid from central government

Finally, Mr Brown may say he is looking at what to do with orphan assets languishing within the banking system.

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What is unlikely to feature?

Despite the shortfall in the public finances mentioned above, the chancellor is not going to admit the battered state of the public purse.

And though the most likely way for the gap to be closed is by an increase in taxes, Mr Brown is not expected to announce any significant tax raising initiatives

He may, however, say there is more money for headline services such as health and education but these are unlikely to be substantial.

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What is the state of the public finances?

The latest report on the government’s finances, released on November 18, provided a fillip to the chancellor. It showed a surge in tax paid by businesses had helped deliver a public sector surplus of £2.2bn in October, compared with a deficit of £1.7bn for the same month last year.

However, borrowing is still on course to exceed Gordon Brown’s budget forecasts, leaving the chancellor with little room to manoeuvre.

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