A Treasury official said this week that he did not expect the Budget to be a “pulse-racing” one. It wasn’t, and not only because of Alistair Darling’s “soporific” speech, said Philip Stephens in the FT.
Many key measures set to be introduced this April – notably the cut in the basic rate of income tax to 20% and a small reduction in corporation tax – had been announced last year; real public spending growth over the next three years – 2.2% – had been fixed last October.
But the main problem for Darling, and the thing that stopped him doing anything interesting with his first Budget, is that his predecessor’s spending spree has left the public finances in lousy shape. The budget deficit is stuck at around 3%, one of the highest in the Western world – just as Britain’s economy looks on the cusp of a nasty downturn.
Growth down, borrowing up
Darling trimmed his growth forecast for 2008 to 1.75%-2.25%, down from 2.5%-3% anticipated in last year’s Budget, although growth is expected to bounce back to 2.5% after that. Slower growth will ensure that the borrowing gap rises sharply to £43bn in 2008-2009, as opposed to £36bn expected just six months ago in the Pre-Budget Report.
In 2009-2010, it will still be at £38bn. And it could well be higher, given that borrowing estimates have “missed their targets by miles over the past few years”, said Liam Halligan in The Sunday Telegraph; moreover, a serious recession on the scale of 1990-1992 could see borrowing jump to around £150bn, said Roger Bootle in The Daily Telegraph. Darling insists the economy is well placed to withstand a US-induced downswing, but with no fiscal cushion, credit tightening, higher household debt than America and the housing market sinking fast, it’s hard to share this optimism.
So given this framework, there was little to do but tinker. Darling confirmed the changes to capital-gains tax and the £30,000 levy on non-domiciled residents, and offered £10m over the next five years for creating a new science fund and £60m to help people develop the skills they need to re-enter the labour market; the small figures highlighted how tight the public finances are, said Nick Robinson on bbc.co.uk, although around £750m is to be devoted to tackling child poverty.
Taxes on alcohol and tobacco will help pay for this; duties on the latter will rise by 2% over inflation for the next four years. Green taxes also hit the headlines; Darling has threatened retailers with a tax on plastic bags and vehicle excise duty has been changed, with high-polluting cars paying more. The net effect is to raise a cumulative £2.5bn by 2010-2011, with most of the pain kicking in in 2009-2010.
Winners and losers
Pensioners and lower-income families, provided they are not big drinkers, appear to be the biggest winners. There’s a modest improvement in child benefit and the child tax credit, while an additional winter fuel allowance of £50 will be given to pensioners this year, although rocketing fuel costs will mean they won’t feel much warmer as a result.
Small businesses face a rise in corporation tax this year, but on the plus side, legislation to stop income shifting (small business owners splitting income with their partner to reduce tax) has been delayed. Savers can at least look forward to a higher Isa allowance (£7,200 this year), but will be irritated to know that had this limit ever risen with inflation, it would now be over £8,000.
The key Budget measures
- The increase in child benefit for the first child to £20 a week is brought forward a year to April 2009, while child tax credit will increase by £50 a year above inflation.
- The Government to invest £765m in 2009 and £950m in 2010 to take 250,000 more children out of poverty.
- Rules for housing and council tax benefit to change from October 2009, to ensure that lower income families are better off in employment. From April 2010, all long-term recipients of incapacity benefit must attend work capability assessments.
- The 2p per litre increase scheduled for April in the duty on road fuel is postponed until October. An increase in real terms will be introduced from 2010. Vehicle excise duty to change from 2009 to encourage cleaner cars.
- Revenue from the levy per plane scheme, which replaces air passenger duty from November 2009, to rise 10% from the second year of operation.
- Alcohol duty rates to increase 6% above the level of inflation this year and by 2% above each year from 2009 to 2012. Beer rises by 4p a pint, wine by 14p a bottle, spirits by 55p a bottle and cider by 3p a litre. Cigarettes to rise by 11.5p a packet.
- The Government “to legislate” to force energy companies to lower tariffs on prepayment meters and reduce bills for poorer customers. Winter fuel payments for the over 60s rise from £200 to £250; and for the over 80s from £300 to £400.