With the election just weeks away, it’s no surprise that Chancellor Alistair Darling’s Budget this year resembled a party political broadcast. There were constant references to tough choices (that the Tories would not have made) and plenty of “specific digs”, said Benedict Brogan on Telegraph.co.uk – notably an attack on Lord Ashcroft via a “convenient” tax information exchange deal with Belize. Darling’s populist announcements included a doubling of the stamp-duty limit for first-time buyers to £250,000. This will be funded by a rise to 5% in stamp-duty on homes worth over £1m. Darling boasts that the top 5% of earners will pay 60% of the additional taxes being raised by pre-announced measures. Isa limits will now rise with inflation.
There was also a series of eye-catching initiatives. These included a £2bn green investment bank and a new national investment corporation to streamline government help to small businesses. But the overriding impression “was lots of itsy-bitsy” measures that “didn’t add up to a hill of beans”, said Jeremy Warner on Telegraph.co.uk. The green bank, for instance, depends for funding on selling off strategic assets in a difficult market. It could be years before it makes a difference, according to Ben Caldecott of Climate Change Capital. Oh, and there’s £100m to fix potholes.
What about the deficit?
The big picture remains worrying. This year’s deficit will come in at £167bn. That’s £11bn less than forecast but still almost 12% of GDP; next year’s total will be £163bn, £13bn less than forecast. Our overall debt pile is still expected to peak at 75% of GDP, down from the original estimate of 78%. We have piled on more debt for the 2008-2012 period than “in the entire history of British governments” up to 2007, said Chris Giles in the FT. As if all this weren’t bad enough, it is based on “hopelessly optimistic” growth figures, said Capital Economics. Darling expects growth to rebound to 3%-3.5% next year and 3.25%-3.75% the next. Yet we have a sluggish global recovery, notably in our main trading partner, the eurozone, debt-soaked households cutting back on borrowing and an ongoing credit squeeze. And then, of course, there’s the fiscal squeeze.
No detail on spending
Enter the key problem with the Budget: we’re still “clueless” about how he’s going to cut spending, said Warner. The government says it’s identified £20bn of cuts even before the (post-election) spending review. This seems to be based largely on efficiency gains, public-sector pay restraint and shunting civil servants off to the regions. But if all this can indeed save £20bn, this figure still “falls a long way short of the detailed proposals for deficit reduction the credit-rating agencies have been demanding”. The absence of detail explains why gilt yields rose after the speech.
The overall theme, said Ian Campbell on Breakingviews, is budget-balancing pain “postponed and concealed”. The markets’ patience is running out. After the election, there will have to be prompt and detailed action. And a “prolonged and painful fiscal tightening”, said Capital Economics. Given the political backdrop, this budget was always going to be “a holding operation”.
Main points from the Budget
• A new government guarantee will mean everyone can have a basic bank account. That gives up to one million more people access to accounts over the next five years.
• Tax credit support for older workers is to be extended. To make it easier for those over 60 to receive working tax credit, the government will reduce the minimum hours they need to work to become eligible.
• Next month’s increase in fuel duties will be staged. Fuel duty will rise by a penny in April, followed by a further 1p rise in October, with the remainder in January.
• Duty on beer, wine and spirits will increase as planned from midnight on Sunday. Alcohol duties will also increase by 2% above inflation for two further years from 2013. Duty on cider will increase by 10% above inflation from midnight on Sunday.
• The inheritance tax threshold will be frozen for a further four years to help pay for the cost of care for older people.
• Business rates will be cut for one year from October. Small businesses will be helped to expand by doubling the annual investment allowance to £100,000.
• Entrepreneurs’ relief for capital gains tax will be doubled to £2m – the new upper limit forlimit for the lower tax rate of 10%.