Budget predictions – part 2

5 min Read Published: 12 Mar 2010

(UPDATE: if you are looking for predictions on what will be in the Emergency Budget please click on this link : Emergency Budget predictions)

Author's note 22/5/10  - The article below relates to the pre-Election Budget:

I recently attended a seminar, run by an insurance company, which touched upon the upcoming Budget and in particular how much revenue Alistair Darling could generate from a number of possible actions available to him. With annual government borrowing of £175bn clearly he needs to raise money from somewhere. So how can he do it?

The table below summarises how much revenue could be generated from each action listed on the left. I must caveat that I am simply relaying these figures as I did not do the original analysis. So assuming they are correct:

Action Extra revenue in 2010/11 (£)
Increase basic rate tax by 1% 4500m
Increase higher rate tax by 1% 1400m
Reduce all personal allowances by  10% 4500m
Increase employer class 1 NIC rates by 1% 4900m
Increase employee class 1 NIC by 1% 4800m
Increase mainstream Corporation tax by 1% 860m
Increase VAT by 1% 4300m
Increase Capital Gains Tax by 1% 80m
Increase Inheritance tax by 1% 40m

So what does this tell us?

For one thing we are in for some hefty tax increases in the future if the Government doesn’t cut public spending significantly. In simple terms the country’s finances are stretched to breaking point.

Interestingly the above figures perhaps highlight why the Chancellor has not tried to increase the Capital Gains Tax (CGT) rate (a widely expected move). At only £80m per 1% increase it would need to be increased significantly to have any impact, especially when compared to just increasing income tax. But perhaps another reason it has not been increased is that it would be seen as a u-turn on the CGT rate cut back in 2006. In addition, Darling wouldn’t announce a future increase in CGT rate in the Pre-Budget Report (PBR) as it would lead to mass profit taking and a slump in stock market. So if/when an increase is announced it will likely be with immediate effect (the upcoming Budget?). On the basis that most people aren’t affected by CGT it probably wouldn’t lose Labour as many votes in an election as say hiking income tax. Given the disparity between the current CGT rate (18%) and the income tax rates it must be only a matter of time before this is addressed. So while CGT may not go up in this Budget I would expect it to in the post election budget. (If the Conservatives get in they would blame Labour for forcing their hand anyway, if Labour get in they have at least 4 years to put things right).

In the Pre-Budget Report, back in December, Alistair Darling did outline his proposals for the upcoming Budget. Among others measures he unveiled the following:

  • All national insurance rates to rise by a further 0.5% from April 2011, raising £3bn a year
  • The return of VAT to 17.5% from 15% from 1 January 2010. VAT
  • One-off 50% tax on bank bonuses of more than £25,000
  • Stamp duty holiday on certain properties to end on 1 January 2010
  • Bingo duty to be cut from 22% to 20%
  • Increases to state pensions and child benefit

So if you were Chancellor how could you generate even more revenue without a voting backlash in the General Election?. To be honest after considering the actions listed in the table above I probably wouldn’t do any of them. Increasing income tax would not be popular with the voters and Darling is already planning to increase NIC rates. Increasing VAT would stoke inflation and might hamper any economic recovery. Increasing inheritance tax would have little impact on finances and would be in contrast to The Conservatives’ wild claims of increasing the IHT tax-free band. As stated yesterday, tax experts Grant Thornton pretty much predict no wild tax increases and who would argue with them. Instead they believe Darling will increase anti-avoidance measures. But who really knows?

One thing I’m pretty certain of is that whoever wins the election taxes will inevitably have to go up and that could be sooner rather than later if the Conservatives win and call an emergency Budget.

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