Budget 2010: what to watch for

ECONOMY

– The Chancellor will confirm the latest figures from the Office for National Statistics, which showed the economy contracted by 5pc in 2009, more sharply than the 4.75pc contraction forecast by the Treasury, and more sharply than independent commentators had predicted. The Chancellor is likely to maintain his forecasts for growth this year at 1-1.5pc, which is in line with independent forecasts.

– Alistair Darling has forecast growth of 3.5pc for 2011 (within a range of 3.25pc-3.75pc) and the same for 2012, using this level of growth as the basis for his borrowing projections. Economists, business groups and international forecasters however do not expect the economy to bounce back so strongly, and some argue that trend growth in the medium term is likely to be less than 2pc. The Chancellor however is not expected to downgrade his forecasts.

Alistair Darling delivers the Budget on Wednesday March 24th. Here's a breakdown of what to expect.

Alistair Darling delivers the Budget on Wednesday March 24th. Here's a breakdown of what to expect.

PUBLIC FINANCES

– The Chancellor will confirm that government borrowing in the current fiscal year 2009-10 will be lower than the £178bn he predicted at the pre-Budget report in December. This is partly because lower-than-expected unemployment has made tax revenues more resilient than projected and limited jobless-related spending. He could say that full-year borrowing will be in the region of £170bn, using any surplus to announce an eye-catching, pre-election giveaway, or a range of small targeted measures to support the poorest families and jobless young.

– Lower-than-expected borrowing this year should allow for modestly lower national debt projections.

– Borrowing numbers beyond this year are likely to remain little changed from the PBR projections. Economists have already argued that over the medium-term Alistair Darling’s estimates look overly optimistic, because they are based on unrealistic forecasts for growth and tax receipts. Any downward revisions would therefore attract further criticism.

– The Chancellor will re-emphasise the government’s plan to halve the deficit within four years, but is unlikely to detail plans for Whitehall spending cuts from 2011 onwards.

– Higher-than-expected revenue from the bank bonus tax could be used to make a small dent in the deficit or be used for targeted measures.

PERSONAL TAXES

– Basic and higher rates of income tax are unlikely to change, as rates and allowances have already been announced in the pre-Budget report.

– But Chancellor could be tempted to augment the 50pc income tax rate for high earners with a ‘super tax’ of 60pc on income over £1m.

– He could also reduce the tax threshold for the new 50pc tax rate from £150,000 to £130,000 to align it with the threshold for anti-forestalling pension measures in the pre-Budget report.

– National Insurance is also unlikely to change again after rates were increased in the pre-Budget report.

– There has been much speculation that capital gains tax could rise from the current rate of 18pc. This would reduce the incentive to cut tax bills by switching investments to generate capital gains instead of income, and would close the gap between the two rates. The new rate could be as high as 25pc or even 40pc, although the government may want defer the decision until after the election. The annual exemption for CGT, currently £10,100, could be raised.

SIN TAXES

– In recent years duties on alcohol have remained relatively static by comparison with the duty on fuel and cigarettes. Raising it by 1pc for beer, wines and spirits would generate nearly £1bn.

– But any further increase in the cost of alcohol or cigarettes kent could be a tipping point that causes people to stop spending or turn to the black market. This could mean the overall tax take actually falls. As a result, the Chancellor may do nothing.

– Petrol is already due to go up every April until 2013, by 1p a litre plus inflation, so any new announcements are unlikely. There has been speculation that the Chancellor will abandon or delay this year’s rise. If he does goes ahead with the increase, he will probably announce the final amount of this year’s rise, which could be between 2p and 3p a litre.
BANKS

Although the financial crisis is no longer at its peak, measures affecting the banking sector will nevertheless be a key part of the Budget, among them:

– Confirmation that the Government will pursue a new banking levy, meaning that in future financial institutions will have to pay a certain amount each year depending on the size of their balance sheet. Mr Darling will most likely frame this as a plan to prevent banks from swelling their assets too much. However, it will wait for a forthcoming IMF report before implementing policy

– New rules for banks: they will be urged to lend more to businesses and provide basic accounts even for low income families.

– An update on the state of the nationalised banks. The Chancellor will hint that the Government will soon be ready to sell off the “good bank” side of Northern Rock, and will hint that it may manage to sell its stakes in Royal Bank of Scotland and Lloyds Banking Group at a profit. The Treasury should provide an update on the level of bank bailout losses incurred by taxpayer, expected to be in the region of £8bn.

PERSONAL TAXES

– Basic and higher rates of income tax are unlikely to change, as rates and allowances have already been announced in the pre-Budget report.

– But Chancellor could be tempted to augment the 50pc income tax rate for high earners with a ‘super tax’ of 60pc on income over £1m.

– He could also reduce the tax threshold for the new 50pc tax rate from £150,000 to £130,000 to align it with the threshold for anti-forestalling pension measures in the pre-Budget report.

– National Insurance is also unlikely to change again after rates were increased in the pre-Budget report.

– There has been much speculation that capital gains tax could rise from the current rate of 18pc. This would reduce the incentive to cut tax bills by switching investments to generate capital gains instead of income, and would close the gap between the two rates. The new rate could be as high as 25pc or even 40pc, although the government may want defer the decision until after the election. The annual exemption for CGT, currently £10,100, could be raised.

– Petrol duty is expected to rise by 3p in April and the drinks industry is expecting a 5pc rise in alcohol duty. A rise in tobacco duty is thought less likely.

CORPORATE TAXES

– The Chancellor could indicate the introduction of a lower corporation tax rate in the future, possibly through staged reductions from the current rate of 28pc. It would be a signal that Labour is committed to making Britain more competitive, and match the Conservatives who have already stated they would reduce corporation tax to 25pc. Alistair Darling could say that Labour would bring corporation tax down to 24pc over the next parliament.

– The business world is hoping for a deferral of the employer National Insurance contributions rise, planned for 2011. The British Chambers of Commerce has argued instead for a 1p rise in VAT which it said would largely offset lost revenue, but a VAT rise is not expected tomorrow.

– An increase in the small companies’ corporation tax rate could be deferred for another year.

– The Chancellor may provide an update on changes to the regime for controlled foreign companies, which are out for consultation.
SPECIAL MEASURES

– Despite the obvious constraints the Chancellor is widely expected to announce a series of initiatives to get the young unemployed back into work.

– With public finances under enormous strain the Chancellor is expected to announce a well trailed crackdown on tax avoidance, with increased fines for those who hide cash offshore. The crackdown could see the maximum fine doubled to 200pc of the tax owed.

– Alistair Darling will lay out the details of Gordon Brown’s ambitious plan to provide super-fast broadband to every home in the UK by 2020 – and most importantly how it will be funded.

ALREADY IN THE PIPELINE

– All those earning over £150,000 will pay a new, 50pc tax rate from next month.

– Banks and building societies have to pay a one-off 50pc tax on bonuses over £25,000 awarded this year, which could raise about £1bn more than the £550m the Treasury’s initial projection. Ernst & Young expects the bonus tax to bring in about £2bn of revenue.

– Employer, employee, and self employed rates of National Insurance will rise by 1 percentage point in total from April 2011, following a further 0.5 point rise announced in the PBR which the Treasury estimated the measures would raise £3bn a year. Employees will pay 12pc of their salaries while employers will pay a 13.8pc rate. The business world has vigorously opposed the planned rise in employer contributions, arguing that it is a “tax on jobs” which will discourage companies from hiring staff at a critical point in Britain’s economic recovery.

– Public sector pay rises will be capped at 1pc for two years from 2011, and pension contributions cut by £1bn a year from 2012.

– The threshold for those paying the 40pc income tax rate is to be frozen in 2012-13

– A 10pc corporation tax rate on income which stems from patents in the UK, to encourage research and development.

source: telegraph.co.uk

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