Budget Preview: Who will be expecting what

Mar 12 2008

ALISTAIR DARLING delivers his first Budget speech later today. But, according to most economists, he will be hard-pressed to stamp his own mark on the event.

That’s because his predecessor in the job, the current Prime Minister Gordon Brown, has left him hamstrung by a series of promises made in last year’s Budget – chief among them, a cut in the basic rate of income tax to 20p, which takes effect from next month.

Mr Brown also left the Government’s finances in a poor state, with spending pledges that have exceeded HM Treasury’s ability to fund them from taxation. As a result, the Government’s borrowing requirement has risen sharply at a point in the economic cycle when it should be falling.

Gemma Tetlow, an economist at the Institute for Fiscal Studies, says that, at £38bn, this year’s deficit is £4bn higher than had been predicted this time last year.

It leaves Mr Darling facing a dilemma. Should he raise taxes to help reduce government borrowing or should he renege on spending commitments?

Either choice is made less comfortable by the fact the economy is facing uncertain times ahead.

The Treasury, the Bank of England, the OECD and many other forecasters have predicted a slowdown in UK growth rates later this year. Investment bank JP Morgan has warned there is a one-in- three chance the UK will go into recession. Any decision to raise taxes or reduce public spending could exacerbate the expected slowdown.

Internationally, the picture isn’t much better. Analysts in the United States last weekend began to voice the opinion that America had moved into recession. They were basing their view on the sharp fall in US employment levels in February.

Peter Stoney, an honorary senior fellow in economics at the University of Liverpool’s School of Management, said: “Mr Darling’s hands and legs are tied. There isn’t much scope for him to do anything very much. This is not going to be a long drawn- out speech.

“Its going to be more of a damage limitation exercise.”

Mr Stoney predicts that the Government will dress up a series of tax rises as green measures that in reality would be nothing more than stealth taxes.

He also predicts that the Government will persist with its plans to tax “non-doms” – a move he said could be disastrous.

“This Government doesn’t understand what that would do to wealth and job creation in this country. You may get some extra tax out of a few people, but you would drive potentially thousands of jobs overseas.”

His views are shared by Tony Caldeira, who owns a textile manufacturing business in Kirkby, is also chairman of the City of Liv- erpool Conservative Party, and has campaigned for business tax cuts.

He said: “In the last few years, this Government has become anti- business. That needs to change.

“Business is desperately crying out for lower tax, especially at this time when the economy is on the brink of slowing down – or worse.

“Taxation also needs to be made simpler. Even the accountants are getting increasingly tied in knots with the complexity of the legislation.”

Mr Caldeira points to what he calls the “pickles” Mr Darling has got himself into over both non-doms and Capital Gains Tax. In both cases, the Government’s original proposals have met with vociferous objections from the business community which have led to talk of amendments which, if anything, make the tax system even more cumbersome.

“They should consult business before announcing their changes, but this Government just shoots first and asks questions later,” said Mr Caldeira.

During his 10 years as Chancellor, Mr Brown spoke a great deal about encouraging an enterprise culture in the UK. As well as a series of measures to encourage people to start their own businesses, Mr Brown reduced corporation tax rates paid by small firms – until last year, when he put the rate back up again.

JACK STOPFORTH, chief executive of Liverpool Chamber of Commerce, believes the Government has lost sight of its enterprise agenda.

Mr Stopforth said: “We want to see some understanding that the Government understands the importance of enterprise.

“Labour did some really interesting stuff for enterprise in its early years, but it seems to have dropped that now.

“In particular, we will be watching carefully what the Government does about supplementary business rates and corporation tax rates for small firms.”

The Government has suggested allowing some English cities to raise supplementary business rates to pay for transport projects, such as trams. Concerns have also been expressed that the rise in the small firms rate of corporation tax has been introduced to offset a cut in the rate for larger businesses. “These days, the Government seems to see enterprise as something to tax instead of something to grow,” said Mr Stopforth.

David Frost, director general of the British Chambers of Commerce, said: “The Treasury has had a windfall from the rising price of oil of £2.2bn since last October.

“The Chancellor should recognise the increasing costs being incurred by business because of rocketing oil prices and scrap the planned 2p rise in small firms corporation tax in April.”

John Wright, national chairman of the Federation of Small Businesses, said: “After the fiasco of Capital Gains Tax, the planned increase in fuel duty and the attack on family firms' tax arrangements, small business confidence in the Government is at its lowest ebb for many years. Alistair Darling should use his Budget speech to mend some bridges.”

The Confederation of British Industry has called for a “radical overhaul” of corporate taxes after warning that the current system was damaging the UK’s competitiveness.

The CBI said taxes should be cut, consultations on any future changes should be improved and an independent commission set up to monitor and review existing arrangements.

RICHARD LAMBERT, the CBI’s director-general, said: “Our traditional tax system is no longer fit for purpose and is making the UK look increasingly uncompetitive. We need bold action to restore a competitive headline rate of corporate tax.

“A radical shake-up is also vital if clarity, certainty and simplicity are to be reintroduced to the system so firms can plan with confidence and make Britain their long-term home.

“We have all seen the to-ing and fro-ing over capital gains tax and non-doms in recent months. Knee- jerk, retrospective change is no way to manage a tax system.“The case for change presented by the CBI tax task force really is compelling. The UK Government should clear away the thick layer of silt that has built up over time in our tax system.”