Pre-Budget Report 2009

09/12/2009

The Pre-election Giveaway – RIP

Chancellor Alistair Darling today defied conventional political wisdom by increasing National Insurance, cutting spending and all but freezing public sector pay. With the country still in recession, Darling has gambled that ‘fair taxes’ to fund jobs will work as a message to voters.

‘Fairer’ taxes

It was the least New Labour Pre-Budget Report since Labour came to power in 1997. Continuing Brown’s departure from the centre ground, today’s Pre-Budget Report was grounded in a core vote strategy.

The Chancellor took from the bankers to give to the unemployed; squeezed the wealthy to deliver a fairer tax system; and ring-fenced schools, hospitals and the police to put the Tories on the back foot.

The headline of the Pre-Budget Report was always going to be the windfall tax on bank bonuses. In the event the Chancellor re-branded his raid on the bankers, saying that he had rejected a windfall tax on profits and instead was presenting banks with a ‘choice’ – use profits to strengthen balance sheets or face a 50% tax on bonuses over £25,000. This proposal looks simple on paper but may be difficult in practice. But by emphasising that it is a one-off measure, Darling is counting on bankers not to flee the UK and banks not to work too hard at avoidance.

The £500m of revenue the Chancellor expects this measure to raise will be used to fund commitments to work and training for the long term unemployed – both under-25s and over-50s. There were also a small raft of announcements designed to promote innovation and enterprise – a reminder that there will be life after the recession.

Spending squeezed

The tax on banks, combined with increased taxes on the wealthy, may play well with voters, but will make little impact on a fiscal deficit that is now officially due to peak at £178bn next year. Ultimately there was no disguising the hard choices that need to be made on public spending.

Frontline services in health and education had funding streams protected past 2011, while the armed forces and overseas aid were also ringfenced. But there was a telling silence around the fate of the rest of Whitehall, where deep cuts will be required alongside painful efficiency gains.

The misery of the public sector will be compounded by pay cuts for Senior Civil Servants and a 1% cap on pay rises across the board for the next three years. Industrial strife from public sector unions is almost guaranteed.

These measures were essential for the Chancellor to announce if he was to maintain a commitment to tackling the deficit and meet the terms of his own Fiscal Responsibility Bill. Politically, he will be banking on voters being sanguine about spending cuts so long as core services are protected.

He will also be hoping that the pleasure of seeing bankers hit with a 50% levy on their bonus pots will outweigh concern at rising taxes for the rest.

Conservative response

Shadow Chancellor George Osborne avoided falling into Darling’s traps. He focussed his fire on competence and credibility, questioning the Treasury’s growth projections and attacking the irresponsibility of Darling’s failure to deal with the fiscal deficit head on.

Characterising it as a ‘pre-election’ rather than merely a ‘Pre-Budget’ Report, Osborne skirted around detailed comment on specific measures and, while highlighting the tax rises that had been announced, he did not commit to remove any of them when in power.

Those looking for succour from Opposition benches and a relief from the tough messages on tax and spending would have been disappointed. Political though the Pre-Budget Report may have been, the divisions are over the timing and size of the cuts to come, not the need for them.

More to come?

The least popular aspect of today’s package may well be the 0.5% National Insurance increase coming on top of the 0.5% increase already announced at the Budget.
Many voters and businesses may well suspect that Labour has gone back to high taxes as a matter of ideological conviction and a Labour election victory will mean more to follow. If this was a pre-election sweetener, voters may well worry about the bitterness ahead.

Economic forecasts
• Economy forecast to shrink 4.75% in 2009
• Growth of 1%-1.5% expected in 2010, rising to 3.5% in 2011-12
• Borrowing in 2009 predicted at £178 billion, dropping to £176 billion in 2010 and £140 billion in 2011, reaching £96 billion by 2013
• Estimated cost of bank bailouts cut from £50 billion to £10 billion
• Public spending in 2010-11 rises by £31 billion
• The Government will introduce a Fiscal Responsibility Bill that will enshrine in law the commitment to half the Budget deficit by 2014

Business taxes
• VAT will return to 17.5% on 1 January 2010
• With immediate effect, a one-off 50% tax has been introduced on banks making discretionary bonus payments to employees of over £25,000. This should raise over £500 million
• Planned increase in corporation tax for small businesses to be deferred for a further year

Personal taxes
• NI contributions for all earning over £20,000 will rise by 0.5% from April 2011
• Inheritance tax threshold frozen at £325,000 until 2011
• Stamp duty holiday on certain properties will end on 1 January 2010
• Personal tax allowances will be frozen for the 40% tax rate (i.e. those earning over a £43,000 threshold)
• The restriction of pension tax relief from April 2011 will apply to those on £150,000 gross incomes, where this income includes all pension contributions, including those funded by an employer
• This will be subject to an income floor, so that individuals with pre-tax incomes (excluding employer pension contributions) of under £130,000 will be unaffected

Benefits and employment
• The basic state pension will be rise above inflation with a 2.5% increase in April 2010
• Child and disability benefits will also rise by 1.5% in 2010
• Revenues raised from the bank bonus tax will be used to fund a commitment to provide jobs or training to all under 25s unemployed for more than 6 months and some older workers
• Free school meals will be extended to an extra 500,000 low income families

Enterprise and innovation
• £500 million capital growth fund to target small businesses
• New 10% corporation tax rate on income derived from UK registered patents
• Enterprise Finance Guarantee Scheme extended by 12 months Environment
• A boiler scappage scheme will be introduced to provide incentives for 125,000 people to replace their existing boilers
• £160 million investment in low-carbon and renewable projects
• £200 million extra investment for Warm Front insulation scheme
• Electric cars to be exempt from company car tax for five years

Public sector
• Planned levels of departmental spending will be adhered to in 2010-11 and there will be no new Spending Review in advance of the General Election
• Spending on front line services in health, education and policing have been ring-fenced
• Commitment to £12billion per annum efficiency savings in the public sector by 2014
• £5billion of savings from scrapping or scaling back projects, including phasing in the roll-out of personal accounts, cutting back on scope of major IT projects, reforming legal aid, refocusing regeneration spending and cutting the cost of residential care for older people by caring for them at home
• Overall commitment to £4.5billion savings from public sector pay and benefits
• Contributions to public sector pensions to be cut by £1billion a year
• Public sector pay settlements to be capped at 1% for two years from 2011 and the senior civil service will see wage costs cut by up to £100million over the next three years
• All appointments over £150,000 and all bonuses over £50,000 will need to be specifically approved by the Treasury
• £2.5billion will be set aside for military operations in Afghanistan
• £5million allocated from the expanded Strategic Investment Fund to help ex-service personnel who want to set up their own business


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