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9 areas to look out for in the Budget

    Gone are the days of the ‘purdah’ when leaking details of Budgets could end the career of a Chancellor. The chase for headlines and the novelty of Coalition has meant Budget negotiations are played out in the national media. With all the briefings and counter-briefings, it’s difficult to keep up with what might be announced. One thing seems clear: there will be no significant deviation from the overall fiscal plan.

    Tim and I have set out some measures we’d like to see. But here’s a comprehensive run-down of things we’ll be looking out for on Wednesday:

    Fiscal rules:

    The Coalition has two fiscal rules:

    • the “fiscal mandate”, first announced in the June 2010 Budget, requires the cyclically-adjusted current budget to be balanced by the end of a rolling five year period; and,
    • a supplementary target for public sector debt, which requires public sector net debt to fall as share of GDP at the fixed date of 2015/16.

    On current forecasts, the Government will only just meet their supplementary target, and have had to ‘roll-over’ their fiscal mandate into the next Parliament –meeting it in 2016/17. A further downgrading of forecast growth would likely mean the supplementary target would not be met, although reports suggest growth forecasts may be more favourable than those seen in the Autumn Statement.

     

    Growth figures:

     “We will do everything, work with anyone, overcome every obstacle in our path to jobs and prosperity,” declared the Chancellor at last year’s Conservative Party Conference. While one might be tempted to ask how he reconciles this admirable statement with the additional employment regulation and higher energy costs on business which have been introduced by the Coalition, it will be interesting to note:

    • how far the growth forecast has changed since the Autumn Statement; and,
    • the estimates of the effects on growth of the policies taken within the Budget.

     

    Personal taxation:

    The Coalition has committed to increase the income tax personal allowance to £10k through this Parliament, thereby implementing the proposals first made in 2001 by Maurice Saatchi and Peter Warburton in Poor People! Stop Paying Tax! The allowance is due to increase to £8,105 for 2012-13, but there are strong suggestions that there will be an acceleration in the race to £10k, which will be expensive. If the Chancellor opts to ‘fund’ it, the HMRC Ready Reckoner suggests each £100 increase will cost £490 million. Previous hikes have been in part funded by lowering the higher rate (40%) threshold, but with the Government planning to remove child benefit from that group, it’s unclear that they would seek to bring more people into it.

    Then there’s the 50p rate. We have long argued that this tax band should simply be abolished. The Chancellor will present research estimating how much extra revenue (if any) the 50p rate has brought in. This is expected to show it raises hundreds of millions of pounds, but not the billions originally forecast. So the Chancellor faces a choice between doing what is right economically – abolishing the tax band – and doing what is popular. One option would be to fudge the issue: for example, he could reduce it in stages (from 50p to 45p to 40p through the Parliament) or to simply commit to abolishing it by a specified date (media reports suggest that a cut to 45p is likely for next year, but many worry this might entrench a rate above 40p for good); another alternative would be to increase significantly the threshold for this tax, to say £250,000. That would be the worst fudge of all.

    It’s also worth watching out whether the Chancellor says anything about merging income tax and national insurance. Last year, the Chancellor began consulting whether the operation of the two taxes should be merged. Many want him to go further and completely abolish NICs. But any change would not be without difficulty. As Andrew Tyrie, Treasury committee chairman, said last year: "This has been a beguiling idea which successive chancellors have looked at very closely and then in the end rejected, largely because it hits the incomes of certain groups in unexpected ways.

     

    Business taxation:

    Quite rightly, the Government says it wants the most competitive tax system in the G20. The main rate of Corporation Tax is due to be cut 23% by the end of the Parliament. But if they want to fulfil their ambition, they should cut it now to 20% and announce the intention to cut it further once the appropriate anti-avoidance measures are in place, as recommended by David Martin in How to cut Corporation Tax.  

    With unemployment high, some Conservatives like Liam Fox would also like to see cuts to employers’ NICs – the most direct tax on jobs. The Government already has an NIC holiday for new businesses for a deduction of up to £5,000 for the first ten employees they take on. But many are now saying this should be extended to all businesses, or used to incentivise youth employment.

     

    Wealth taxes and tax avoidance:

    Rumours over the removal the 50p tax rate have led to fresh demands from Liberal Democrats for a new ‘wealth tax’. Two main ideas have been mooted:

    • the mansion tax proposals from the last Lib Dem manifesto. We  highlighted the moral and practical flaws in such a proposal in our influential paper, Taxing Mansions  and hope that this idea is not entertained. Moves to stamp out stamp duty evasion would, however, be welcome; and,
    • the introduction of a sort of minimum tax for high-earning individuals – a tycoon tax, which could turn out to be an administrative nightmare.

    Media reports suggest the latter is more likely, but it’s unclear whether either will come about. But there has also been suggestion the Government will introduce a General Anti-Avoidance Rule and even a higher rate of stamp duty on expensive properties.

     

    Child benefit:

    The Government intends to remove child benefit from families containing a higher rate taxpayer from 2013. This was apparently dreamt up one the eve of the Conservative Party Conference in 2010, and has, rightly, attracted vast criticism. A single parent earning £45,000 would lose the benefit, whilst a two-earner household with both parents earning £42,000 would retain it. IFS analysis has shown the cliff-edge effect will produce hugely distorted incentives. Nevertheless, the Chancellor seems committed to implementing the policy, but with changes to how it is implemented. This seems to be huge price to be paid by millions of families for an ill-conceived gimmick.

     

    Pension fund investments and credit easing:

    Prior to the Autumn Statement, the Government signed a Memorandum of understanding with two groups of pension funds for £20 billion of investment in UK infrastructure. Expect more details about this and the credit easing proposal, which essentially operates as a loan guarantee scheme to encourage banks to lend to small businesses. I expect we’ll also here about some new infrastructure projects as well, even if it is a re-iteration of the PM’s recent infrastructure speech.

     

    Supply-side reforms:

    I’ve lost track of whether this is just a Budget or another growth review as well. But if the latter, we might here some more crystallised thoughts on changes to employment law (and see Dominic Raab’s proposals in Escaping the Strait Jacket ), national pay bargaining and, in particular, planning. It seems the Government is unlikely to adopt the full raft of radical employment measures outlined by the Beecroft analysis last year. But we might expect some targeted deregulation for small and micro-businesses, especially with regard to employee benefits and compensated no-fault dismissal.

     

    Long-term care:

    The Government has so far kicked the proposals from the Dilnot Commission into the long-grass, with a White Paper expected in June. The Chancellor might be tempted, however, to give an indication about whether the Government is willing to commit more in the way of taxpayers’ funds to long-term care provision.

    Ryan joined the Centre for Policy Studies in January 2011, having previously worked for a year at the economic consultancy firm Frontier Economics.

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