Escalating war costs and overoptimistic GDP estimates mean this is likely to be a budget we'll all w...
Escalating war costs and overoptimistic GDP estimates mean this is likely to be a budget we'll all want to forget, argues Charles Ansdell, Head of Corporate Communications at Inter-Alliance Group PLC.
There was a time, a few years ago, when Brown was the City's darling. His "Laissez-Faire" policies and small business boosts made him a favourite of business and consumers alike. But since then, Gordon has proved to be a fair weather Chancellor. In the boom of the late 1990s, Brown could piggyback off the successful Tory policies and enjoy the benefits of a rapidly expanding economy. Fiscal surplus, high consumer confidence and record markets made it a great time to be Chancellor.
The story of the last couple of years has been very different. As markets and the economy have depressed, so Labour have turned their focus to the public services. And while the City has been clamouring for fiscal stimulus, Gordon has reverted to the Old Labour ideology of tax and spend.
As if this weren't bad enough, the money committed to the public services was based on GDP estimates of 2.5-3% in 2003 which have proved hopelessly optimistic. This has left the Government with a severe shortfall. Moreover current data shows retails sales and consumer confidence at their lowest level for 10 years, indicating that GDP is likely to be further depressed. Add to this an exceptional bill for military action in the Gulf War, and the Chancellor has a major problem on his hands.
Quite simply, the Government is going to need a hell of a lot more money to meet its commitments. They will issue some paper (borrow) to do this, but their main source of funding is likely, as always, to be tax. So the burning question remains - who and what is likely to be taxed?
The good news for businesses is that the Chancellor knows he would be dicing with death to add any extra tax burdens onto businesses. Corporation Tax is likely to remain untouched, though he is likely to see a massive fall in revenue from businesses as profits fall. If anything, the Government is likely to adhere to its view of business as the real driver of economic growth and prosperity.
It is possible he may well tweak some of the tax offering for small businesses. At the last pre-Budget, Brown introduced incentives for poor areas, creating 2000 Enterprise Areas to encourage entrepreneurship. These incentives included new grants of up to £30,000, Business Planning Zones and enterprise events. Such incentives may well be upped as the Government tries to win back small business trust.
Another area that was targeted in the pre-Budget for SMEs and may attract further incentives is training. A New Modern Apprenticeship Taskforce was introduced, £130m was earmarked for Employer Training Pilots and the Highly Skilled Migrant Programme extended, which helps high quality immigrant workers join SMEs. The Government's training approach may well be extended to further help small businesses.
The other area which the Government has been focusing on has been VAT. From April 5th the flat rate VAT scheme is to be extended to businesses with an annual turnover of £150,000. It seems likely the Government will continue with its measures to reduce the burden of VAT compliance for small businesses.
It is also unlikely that the Chancellor would play with Capital Gains Tax and business assets taper relief, given that this generates such a small amount of revenue. It therefore seems likely that SMEs will not receive too much bad news from the budget, but it also seems extremely improbable that they will receive anything to shout about.
Making it Personal
Indeed, the most likely suspects will be individual taxation. Income Tax should remain unscathed. We can assume that the basic rate of 22% tax is sacrosanct and that the Chancellor is unlikely to tinker with higher rate income tax.
The most likely suspect will, once again, be National Insurance Contributions, which is the most favoured of the Chancellor's "stealth taxes". It is possible he might increase the top banding from 11-12%, and extend beyond the upper limit a 2% NIC rate. That said, with the 1% rise just introduced, this may well be seen as too obvious a target. Nevertheless, the obvious synergy between raising from this source to pay for the NHS is quite compelling - after all, this was originally the plan when the NHS was set up in 1948.
The other obvious target looks to be VAT. At 17.5% this is lower than most European countries. The Chancellor here could also use the argument that to bring the NHS up to the standard of our EU partners, our VAT rate should be identical. This would also correspond to calls for VAT harmonisation across the EU. While NIC is more obvious to consumers, VAT is a non-direct, discrete tax, and therfore the impression of choice could be given to the electorate. Indeed. VAT looks the most likely suspect to be hit.
Capital Gains Tax, because of the small amount raised (after the stock market performance of the last few years, even fewer people are likely to have capital gains), is likely to remain unscathed. Inheritance Tax only affects a small proportion of the population, though rising house prices have brought more people above the £250,000 nil rate band (the amount of your estate before you have to pay any inheritance tax). Stamp Duty seems a more likely target, given the relatively good performance of the housing market over the last couple of years. An increase in the tax on the differing banding levels would help boost the Exchequer's coffers.
A big rise in excise duty on cigarettes and alcohol looks likely, especially since they are directly or indirectly responsible for much of the NHS costs. It is also possible that there may be a resumption of tax relief for contributions made to a private medical insurance scheme to help boost private provision, and remove some of the onus off the NHS.
Punching into Financial Services
Financial Services is likely to be hit by Brown, if recent history is anything to go by. Hot favourites look like life assurance bonds, with the 5% tax deferral withdrawal facility likely to be hit. This is hardly likely to be too popular in financial services, though Sandler's been debating this for some while.
But will the Chancellor offset this by cancelling the proposed removal of the 10% tax credit on equity dividends in ISAs, a move which has come under increasing fire from the beleaguered fund management industry? This is a possibility, especially since this will help prevent further migration to bonds, and therefore a potential bond bubble.
It's fair to assume that pensions will be left alone after the green paper. Fears that higher rate taxpayers will lose their benefits look unfounded.
Although the chancellor will almost certainly have planned for the public sector costs, the exceptional costs of conflict in Iraq remain a problem. There is also concern that any increase in public sector expenditure will be swallowed up in wage increases - thereby not leading to better quality public services. Indeed, we have seen with the Fireman's strike and other threats of industrial action that public sector workers and unions are keen to get their hands on this extra money.
It therefore seems that Gordon will have to keep taxing us more and more. We should also expect stealth taxation, through the removal of small tax breaks (for example, dividends on Equity Income ISAs lose their tax credit from next year). However, it is clear that this time he will have to go for some serious tax and spend.
This, understandably, is unlikely to be popular with the electorate. Combined with negative public opinion over the Gulf War, this budget could well present this Labour Government with their biggest test to date.
Charles Ansdell is PR spokesman for Inter-Alliance
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