Wednesday, 21 March 2012

Budget 2012

The politics and economics of today’s Budget
A defining budget?

Today’s Budget was delivered at the mid-term point of the Coalition’s term of office, so conventional wisdom would suggest that the Chancellor would deliver a low key budget which gives an indication of the direction of travel the Government will take in the latter part of this five year term. Low key and un-dramatic was not what we got today. The Chancellor claimed he “had not settled for a do nothing budget.”

Despite the reduction of the structural deficit remaining the guiding principle of the Government’s economic strategy, the Chancellor demonstrated his political creativity by balancing a range of bold measures to assuage both parties in the Coalition. This is no easy task and it seems the Chancellor, who is never short of political acumen, has achieved just that. The Budget remains fiscally neutral and the moves on tax will have to be funded by further cuts in other areas.

The big gamble

Despite the political balance achieved in this Budget, the reduction of the top rate of tax is a political gamble. The public do not appear to be on the Chancellor’s side on the issue with polling suggesting the majority of the country is against such a move. The Chancellor will be hoping that the balanced nature of the budget “to support working families” will shine through public pessimism. The Chancellor also sneaked in a £5bn cut for pensioners which has already been labelled “Granny Tax” and suggested another £10bn of welfare cuts would be forthcoming.

The Liberal Democrats are claiming several victories in today’s budget labelling it the ‘Robin Hood’ Budget. They have achieved at number of measures to assuage the claim that this is a budget for the rich including a 7% stamp duty rate being introduced on residential properties worth more than £2m. It’s not labelled a mansion tax but it’s not far off. Increasing the personal income tax allowance will also lend the Liberal Democrats much needed credibility in the eyes of the public if they can convincingly claim ownership.

Growth improving……but more needs to be done

Growth in the UK economy remains sluggish but there was a glimmer of hope in the Office of Budget Responsibility’s growth forecast for this year improving to 0.8%.

The Government's forecast for public borrowing in 2012-13 was £120bn, and despite the Government borrowing almost twice as much as expected in February, today the Chancellor informed Parliament that the actual number will fall below £100bn next year for the first time since 2008-09. This is because of a one-off windfall of about £28bn from a transfer of assets from the Royal Mail pension fund.

The end game

Ed Miliband leading Labour’s Budget response today was caustic. He called it a “budget for millionaires” and landed several hits on the government. No one was safe from the on-form opposition leader who unleashed the term “calamity Clegg” on a willing blogosphere. Miliband also reminded the public that all of the Conservative front bench would benefit from the reduction in the top rate of tax.

Yet such short term performances cannot mask the fact that Labour still lacks economic credibility in the eyes of the public. Miliband’s shadow Chancellor Ed Balls remains a divisive figure, unable to disassociate himself from the previous government. The reduction in the top rate is a natural gift for Labour but the opposition will need to go some way before it can lay claim to be electable.

Mid-term Budgets of this kind rarely determine election outcomes and this one will not. George Osborne has laid down a marker about how he wants to manage the economy – rewarding the high achievers while slowly reducing the burden on others as economic circumstances allow. If the economy does pick up the public appetite for tax cuts will pick up with it, leaving Labour struggling to keep up with public expectation.

The Budget headlines

Economic forecasts
  • The Office for Budget Responsibility (OBR) expect the British economy to avoid a technical recession with positive growth in the first quarter of this year. They say that the British economy has “carried a little more momentum into the new year than previously anticipated”. 
  • The OBR revised up their growth forecast this year to 0.8%. OBR growth forecasts for UK: next year 2%; 2014 2.7%; 3% in 2015 and 2016 
  • The OBR’s forecast unemployment rate is the same as it was last autumn. They expect it to peak this year at 8.7 per cent before falling each year to 6.3 per cent by the end of the forecast period. 
  • Borrowing this year is set to come in at £126 billion; £1 billion lower than forecast in the Autumn Statement. 
  • The deficit is predicted to fall to 7.6% next year. Debt forecast will now peak at 76.3% of GDP in 2014/15 rather than 78% in previous forecast. 
  • OBR Eurozone growth forecast for this year revised down from 0.5% to -0.3%. 
  • UK inflation forecast to fall from 2.8% this year to 1.9% next year. 
Business and general taxes
  • The Government will consult on the removal of VAT loopholes and anomalies. The broad exemptions on food, children’s clothes, printed books and newspapers will remain. 
  • The Chancellor has announced a further cut of corporation tax of 1%, to start immediately. The cut will continue with the two further cuts planned next year and the year after so that by 2014, corporation tax will be 22%. 
  • The Government will introduce legislation relaxing the Sunday trading laws during the eight week Olympic period. 
  • A tax relief for the video games, animation and high-end television production sectors has been announced. 
  • The bank levy will be increased to 0.105% from next January so the banks do not benefit from corporation tax cuts. The levy will raise £2.5bn a year. 
  • Enhanced capital allowances for businesses setting up in new Scottish enterprise zones in Dundee, Irvine and Nigg. A Welsh enterprise zone will be created in Deeside. 
  • There will be a consultation on simplifying the tax system for small firms with a turnover of up to £77,000. 
  • Government support for £150m of tax increment financing to help councils promote development and an extra £270m for the Growing Places fund. 
Housing and planning
  • The Chancellor announced the expansion of the Get Britain Building Fund that provides upfront finance to construction firms to build new homes. 
  • The Stamp Duty Land Tax charge on residential properties held in corporate envelopes over £2m will be increased to 15% and will take place today. 
Income taxes, NI and personal allowances
  • The personal allowance of income tax will increase from next April to £9,205. 
  • From April next year, the top rate of tax will be reduced to 45p. 
  • There will be a new single tier pension for future pensioners, set above the means test - currently around £140. There will be an automatic review of state pension age to ensure it keeps pace with the ageing population. 
  • From 2014, taxpayers will at the same time receive a new Personal Tax Statement. 
  • Child benefit will be withdrawn in stages when someone in the household has an income of more than £50,000. 
Fuel and transport duties
  • Vehicle Excise Duty (VED) will rise by inflation only. To encourage fuel efficient fleets, the Government will extend the 100 per cent first year capital allowance for low emission business cars. 
  • The Government will reduce the CO2 threshold for the main capital allowance rates and increase the percentage list price of company cars subject to tax. 
  • The Chancellor also announced that he was again freezing VED for road hauliers. 
  • The Chancellor confirmed the fair fuel stabiliser. There will be no changes to fuel duty plans. 
Economic “bads”
  • There are no further changes to the rates of alcohol duty put in place by the previous government. The Government will shortly be publishing its Alcohol Strategy to address the growing problem of alcohol abuse, and the many billions of pounds it costs our NHS and criminal justice system. 
  • Duty on all tobacco products will rise by 5 per cent above inflation. That’s 37 pence on a packet of cigarettes. This will take effect at 6pm tonight. 
Other points of note
  • The Government will seek "major savings" in the administrative cost of the Carbon Reduction Commitment, and bring forward an alternative environment tax this autumn if such savings cannot be found. 
  • Ministers will consult on expanding airport capacity in the South East of England. 
  • There is new funding for a total of 250,000 more apprenticeships over the next four years. 
  • Mayor of London Boris Johnson receives a £70 million development fund to attract new business and new jobs. 
  • The National Planning Policy Framework will be published next Tuesday. 
  • The Government announced funding for ten major cities to become super-connected through superfast broadband. A further £50 million of funding was announced for other cities. 
  • The Government will consult on offering gilts with maturity terms of more than 50 years. 
  • Anti-avoidance measures in this year’s Finance Bill are expected to increase tax revenue over the next five years by around £1 billion. 
A cautionary note

Mind the gap

Budget Statements are famous for “gaps” – the hidden detail and stealth consultation that eventually emerge from the mass of paperwork released on the day. Over the next week, think tanks, MPs, academics, tax and economic experts will pick the Budget apart word by word and graph by graph.

Keep on track with PSA

As and when greater detail emerges on key issues, we will let you know. However, if there is something in particular that you would like us to look out for, or to follow in detail, please let us know.

Friday, 3 February 2012

Not too fast, Mr Huhne.

For many observers, Chris Huhne’s Cabinet exit has been bizarrely slow.
The most predicted Cabinet resignation since Clare Short flounced out in 2003 finally occurred today.  The LibDem MP for Eastleigh succumbed to months of pressure over an alleged offence for which he has now been charged.  The ex-DECC Secretary of State faces a Watergate-like charge relating to an alleged cover-up of a possible motoring offence.
At the point of charge, his exit was politically inevitable.  Yet Mr Huhne has been skating on the thin ice of a Cabinet departure for months.  Almost since the Coalition Government took office, Mr Huhne’s fingerprints have been detected on Cabinet leaks, anti-Conservative briefings and other political mischief-making.
From his over-the-top "Goebbels" jibes about the AV referendum to the immigration "cat flap", the former Minister seemed to take little notice of the doctrine of Cabinet collective responsibility.  His reputation for negative briefing even saw journalists making automatic assumptions – wrongly as it turned out – that he was behind the leaking of a letter proposing a new Royal Yacht.
If the Cabinet were populated by a single political party, Mr Huhne may have been spending more time with his family – or families – much earlier than today.  Now, regardless of the outcome of the judicial process, it seems likely that the ambitious MP’s life in the political fast lane has come to an abrupt, and terminal, conclusion.