Darling's buds for may
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Lee Jones reports that with a spring general election looming, the Chancellor has to come up with a balancing act in his pre-Budget report with tax rises to boost Government coffers while trying to offer some vote-winning strategies
The Government admitted last week that Chancellor Alistair Darling’s pre-Budget report will include a series of tax rises but where will the increases be implemented and who will be paying more?
The 2009 Queen’s speech included proposals for a bill that would pledge to halve the national deficit from around £175bn to £85bn. At a briefing before the speech, First Minister Lord Mandelson said: “We will rebalance the public finances over the medium term and we will cut our cloth accordingly. Of course, there will be changes in tax and public spending, so much is obvious.
“But when, how and on what basis in relation to which areas of Government expenditure is something that the Government will address initially in the pre-Budget report and again after the election.”
Killik & Co head of financial planning Malcolm Cuthbert says: “The Government will try to spin the positive in the pre-Budget report but promising to halve the deficit is huge - to do that you will have to put up a lot of taxes to get anywhere near that figure.”
But the Government’s need to raise billions in extra tax revenue is set against a backdrop of a general election in the first half of next year.
Fidelity International head of tax and trust planning Paul Kennedy says it is this conflict which makes it so hard to predict which taxes will be raised and by how much. He says: “Not a single tax expert has seen any of the big tax changes of the last 10 years coming. Two years ago, for example, we had the bigg- est-ever change to capital gains tax and no one predicted that.”
But there are some obvious areas where finances and electioneering go hand in hand.
Accountant MacIntyre Hudson thinks the Government will go for high-earners to create quick increases in tax income. It says Darling may increase the main rate of capital gains tax from 18 per cent to 25 per cent.
Principal Patrick King says: “Increasing the main rate of CGT will at least have the politically symbolic effect of making absolutely sure that higher-earners pay more tax than those on low incomes. This is an easy political victory in the current economic climate and anything higher than 25 per cent would be too punishing during the fragile recovery.”
But Cuthbert believes it is unlikely the Government will backtrack on its previous CGT cuts and says: “VAT is an obvious one. A rate of 17.5 per cent is low for EU standards, so it might be a good argument to say VAT will rise to EU-standard levels in stages, putting off the difficult stages until after the election.”
Kennedy says income tax is a prime example of the political balancing act facing the Chancellor. “If you want to raise money fast, the obvious option is a rise in income tax but politically no one has seen fit to do this for many years. It is the big tax that either brings in or gives away an awful lot of money. But then if you increase income tax, you stifle demand in the economy, reducing what could be invested and missing out on other taxes. This is all a political juggling act.”
The pre-Budget report is likely to be as much about politics as it is about finances so the Government could choose to give as well as take. King says the Chancellor is likely to set out changes designed to aid the tentative economic recovery through a series of business-related measures.
He says a scheme to allow businesses to carry back trading losses for up to three years set against corporation tax with a cap of £50,000 could be exten- ded for one year.
However, King says the Chancellor will also use this as a basis to introduce a limit on how far businesses can carry losses forward against future tax bills. This would stop financial firms in particular from offsetting future healthy profits against losses made during the financial crisis.
King says: “Darling is likely to introduce a limit on how far businesses can carry losses forward against future tax bills, to a period of six years as a means of cracking down on the financial sector in particular.
“By restricting the ability of firms to carry forward losses, the Chancellor would strike some kind of balance between satiating public anger while avoiding a perverse tax raid on a sector that needs to build up its capital position first.”
Cuthbert thinks an extension of the stamp duty break for properties under £175,000 would be a winner in marginal seats but also thinks the Chancellor will use the pre-Budget speech as a way to take on multiple election issues.
He says: “Giving VAT, corporation tax or national insurance holidays to small and medium-sized business who take on new employees would be a nice election spinner. I could see the Chancellor painting it as trying to help struggling UK businesses taking on more young, unemployed people.”
But Kennedy warns against acting before Darling makes his moves. He says: “One has to be careful that tax predictions are not interpreted in such a way that they act detrimentally on their finances. Any advice should not be based on speculation to an extent that you cause people to act on that speculation.”
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