It’s that time of year again. Budget day looms on Wednesday. You probably know the routine by now, but in case you’re blessedly unaware, here’s what usually happens.
The Chancellor stands up and gives us a blurb about how much better off we are than a select few other countries. That’ll be tough this year. But I expect he’ll mention the US unemployment rate plus their house price crash, while omitting their massive GDP bounce.
He usually then makes excuses for why public borrowing is so much higher than he said it would be last year. He then makes some ridiculously optimistic forecasts with a straight face. He’ll talk about hard-working families and green incentives. Then he sits down.
One side applauds, the other side carps. And then the real bad news slowly trickles out for weeks afterwards as tax experts pore over the small print, and try to figure out what it all means.
So can we expect anything different this year?
Be aware: Budget 2010 is different
Wednesday’s Budget is a bit special, because there’s a tightly-fought election just around the corner which has to be called by early June at the latest. And even although everyone reckons it’ll be called for May 6th, I wouldn’t bet against Gordon Brown hanging on until the very last moment.
The Budget is the government’s last big sales pitch before then. So the pressure is on Alistair Darling to make this one count. On the one hand, we’re being told that Mr Darling would rather like to make a start on fixing the shocking state of the public finances. But we’re also told that Ed Balls and Mr Brown would rather he kept on spending, and delivered some pre-election sweeteners.
I don’t know how much of this is true. Against most of my better instincts, I quite like Mr Darling. When he made his comment in 2008 about Britain facing the worst recession in 60 years he got it absolutely right, well before most others had admitted we were facing any sort of recession at all.
But I’m so cynical about politicians that I suspect this is a “good cop, bad cop” act designed to impress the voters before polling day. Darling plays the honest, trustworthy grafter, standing up to his boss in Number 10, and wins sympathy votes for the party in the process.
In any case, all of this “Darling vs Balls” stuff is a sideshow. It doesn’t matter who wins the next election. The state of the public finances has to be tackled. That means spending cuts and tax rises too.
What this Budget will be about
So here’s what this Budget will be all about – presentation. Mr Darling will present a sober face. He’ll admit the public finances need to be tackled. And if public borrowing comes in below his £178bn forecast, as it may well, he’ll no doubt make a big song and dance about how he won’t be spending any of this “windfall”. This is like being £9,900 in the red, and saying that you won’t spend that last £100 of your overdraft limit – but it’s the presentation that counts.
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He might even make some concession to higher taxes. Capital gains tax (CGT) is an obvious target; it ticks almost all of Mr Darling’s boxes. It’s basically a tax on the wealthy. Only wealthy people own enough assets to have to worry about managing CGT. Everyone else can shelter from it behind their annual allowance and by sticking their investments in an Individual Savings Account (Isa).
And the CGT threshold, at 18%, is very out of step with income tax. That creates huge incentives to try to substitute income for capital gains. That’s good news if you’re a provider of risky investment schemes with great tax breaks, such as Enterprise Investment Schemes and Venture Capital Trusts. But you can certainly argue that it’s unfair to give tasty tax breaks to those who are sufficiently well off to game the system.
This way, Mr Darling could point to lower borrowing, and show he has a stomach for raising taxes, yet all apparently without hurting the ordinary voter. But there’s just one problem. CGT raises buttons in terms of tax revenue. The government expects to make more money this year by taxing wine (that’s just wine, not beer or spirit duty) than it does from CGT. CGT is set to raise £2.5bn, while wine duty will raise £2.9bn.
£2.5bn is about 0.6% of the tax that HMRC expects to rake in this year. Now that’s partly because asset prices have plunged, which means there aren’t a lot of capital gains to tax. But even at its peak – last year – CGT ‘only’ raised £7.8bn, which was a lot less than tobacco duty for example, at £8.8bn.
Taxes will be hiked – but not until after the election
The truth is that HMRC makes nearly three quarters of its tax revenue from just three taxes. Income tax (about 34%), National Insurance, which is income tax in all but name (about 24%), and VAT (about 17%). If you want to see for yourself, by the way, it’s all here [pdf].
So any government that’s serious about tackling the deficit is going to have to hike one of those. But it won’t happen this side of the election. National Insurance has always been the tax of choice for Gordon Brown, because it’s the stealthiest of the major taxes. But people are starting to cotton on to that one, and it’s already going up from April 2011. And income tax and VAT won’t be touched – those are far too obvious.
In short, Mr Darling will talk a big game on Wednesday. But the details will be piffling. All the major parties know that the election will be followed by higher taxes and job losses. The Budget will merely be an exercise in pretending to voters that this can somehow be done painlessly. Don’t fall for it.
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