With only six months to go before a general election, it’s no surprise that Chancellor Alistair Darling’s Pre-Budget Report speech concentrated on “keeping the electorate as sweet as possible” – it was “stuffed full of political messages”, as The Daily Telegraph’s Jeremy Warner put it. Within the first few minutes, he said that Britain faced a choice between going for growth and trying to slash the deficit too quickly, thus criticising the Tories’ calls to cut the deficit more quickly. From there, “every other line was shaped to make a political point”, said Benedict Brogan on Telegraph.co.uk.
Bashing the bankers
The most eye-catching populist measure was an immediate, one-off tax on bankers’ bonuses above £25,000 that will apply to all banks operating in the UK. This is the modern equivalent of “throwing enemies to the lions”, as Ian Campbell said on Breakingviews.com. But it should be less deadly, as it looks relatively easy for banks to mitigate the impact. Yet however much the industry deserves it, the bonus tax – which the Treasury hopes will raise £500m – is a sideshow.
Don’t count on the forecasts
The key issue is still the big picture: growth, borrowing and debt. The Chancellor admitted his growth forecast of a 3.75% fall in GDP was wrong. This year’s figure is now 4.75%, taking the total peak-to-trough slide in GDP to almost 6%. But next year he reckons growth will bounce back to 1%-1.5% and 3.5% the year after, which looks “optimistic”, as Travelex said. Next year’s figure “has been jeopardised” by this week’s poor data on retail sales and factory output. The withdrawal of “monetary steroids, the overhang of personal indebtedness” and the ongoing credit squeeze and rise in unemployment all mean that recovery will be “painful and slow”, with a double-dip recession a distinct possibility, as Lib Dem Treasury spokesman Vince Cable said. That means that borrowing and debt figures could well be wrong – financial government forecasts have a lousy record – and we will need to borrow even more than £178bn this year, and £176bn the next.
The worry is whether the markets “will buy in such quantities”, as Campbell said. If not, there is the prospect of a gilts strike that would push long-term rates up, choking off the recovery. The day before Darling spoke, ratings agency Moody’s issued another reminder that we need to get on top of our debt. But all we got this week was plans to raise government spending and “a little muttering about pain in the future” including a rise in national insurance from 2011 and caps on public sector salaries and pensions.
A “holding operation”
Indeed, on the key question of spending cuts to reduce the deficit, there was scant detail overall. “Those who were expecting a plan for reducing public expenditure will be disappointed,” said Miles Templeman of the Institute of Directors. The spending review has been delayed until after the election. The whole theme is “prudence postponed”. There is “serious doubt” over the government’s commitment to cutting the deficit. Still, the markets are unfazed for now. Gilt yields even retreated a little as Darling spoke. That’s because the script is set to be “largely rewritten” in six months’ time, said Warner. Quite, said Capital Economics. This speech always looked like a “holding operation”. A “much bigger fiscal tightening” is due after the election, whoever is at the dispatch box.
Main points from the Pre-Budget Report
• The Enterprise Finance Guarantee Scheme for bank loans to small businesses is to be extended for a further 12 months, guaranteeing a further £500m of loans. The Strategic Investment Fund set up to support high-tech projects has been given a £200m boost.
• The increase in corporation tax for smaller companies is to be deferred, leaving the 2010 tax rate unchanged. The Time To Pay scheme allowing firms to spread their tax payments will be extended for as long as needed.
• A 10% corporation tax rate is to be introduced on income from patents in the UK.
• The empty property relief threshold is to be extended, meaning that 70% of all empty business properties will be exempt.
• All public sector pay settlements will be capped at 1% for two years from 2011. State contributions to public service pensions for teachers, councils, NHS and the civil service are to be capped by 2012.
• £5m has been allocated to help ex-service personnel set up their own businesses.
• Bingo duty is to be cut from 22% to 20% for next year’s Budget.