Grayling Blog

A Taxing Budget

Posted on 24.03.2011 by Jason Raj

George Osborne has just delivered his first ‘proper’ Budget, after his emergency Budget of last June. The spin in the preceding few weeks and months has been along the theme of ‘the Budget for Growth’, but it was probably last year’s Budget and the subsequent Comprehensive Spending Review that will matter most for the country’s long-term prospects.

 

• 2010-11 growth prediction revised down from 2.1% to 1.7%
• Reduction of Corporation Tax by 2% from April 2011, with a 1% cut in each proceeding year until 2015, taking Corporation Tax to 23%
• Fuel duty cut by 1p as of 6pm today, with 2011-12 inflation-only increases deferred until January 2012, and the fuel duty escalator abolished and replaced with Fuel Duty Stabiliser
• Personal allowance increased to £8,105 from April 2012 (extra £630 on top of previously announced increase)
• Consultation to begin on merging Income Tax and National Insurance Contributions
• £250m funding for first-time buyers to help 10,000 families to get on the property ladder (via low-interest loans for deposits)
• Extra £100m funding for science
• £200m extra funding for investment in regional railways (Manchester Piccadilly and Manchester Victoria; and Swindon to Kemble)
• Extra £2bn funding for Green Investment Bank from asset sales, and the bank will be given borrowing powers (but not until 2015)
• Introduction of a new presumption in favour of sustainable development, so that the default answer to development is ‘yes’
• Reform of Gift Aid – including benefit limits to increase from £500 to £2500

 

Osborne’s hand was weakened somewhat yesterday when February’s inflation figures came out above market expectations – and above the Bank of England's Inflation Report estimate published just last month. One or more interest rate rises in the summer is now virtually a certainty. As a result, Osborne has had to downgrade his forecast for growth in 2011 and 2012 – something of a blow for the Chancellor but he insisted growth in later years will offset this. Osborne can also reasonably point to the instability in the Middle East as an unexpected driver for soaring oil prices and pushing up inflation and undermining growth.

 

That said, arguably the most important measure to come out of the Budget is indeed one for the long-term. The Chancellor announced the Government will begin developing plans for merging Income Tax with National Insurance Contributions. This follows an Office of Tax Simplification review which found strong support amongst businesses which have long been exasperated at the differing thresholds and myriad of regulations and exemptions.

 

The most important specific immediate proposal is surely Corporation Tax. Osborne pulled off a major coup here by announcing it would be cut by 2% from this April, and not merely the 1% already planned. This will be followed by a 1% cut in each proceeding year until 2015, taking Corporation Tax to 23%. To support growth in specific areas, he confirmed the creation of 21 Local Enterprise Zones, echoing the policy championed by Thatcher in the 1980s.

 

While no-one was expecting this to be a ‘giveaway’ Budget, there were a few well-trailed tax cuts, not least the raising of the personal allowance to £8,105 from April 2012, and the Government remains committed to a threshold of £10k which is a key Liberal Democrat objective. The threshold is already set to increase by £1,000 next month, and today’s announcement represents a further £630 increase next year. As expected, the Chancellor also postponed the scheduled fuel duty increase (in line with inflation) to relieve pressure on motorists but he then went further and cancelled the ‘fuel duty escalator’ completely. There was real shock in the Chamber when he revealed an immediate 1p cut in fuel duty, although this has resulted in environmental groups questioning the Treasury’s claims that today’s Budget was the “greenest ever”. The Budget also included proposals for a pilot scheme to discount fuel duty by 5p per litre in remote rural areas, subject to EC approval.

 

Some pressure groups and a few on the Conservative right had called on the Chancellor to announce a timetable for scrapping the 50p income tax threshold. Osborne resisted this, perhaps swayed by conversations with newer Conservative MPs who warned that such a move would play very badly with their voters. But to appease the Right, Osborne did confirm he has instructed HMRC to examine precisely how much extra revenue the 50p tax rate in raising, with a pledge to abolish it early if it is ineffective.

 

Other high-profile measures included the so-called ‘Learjet levy’, whereby those flying on private jets will now (subject to consultation) be required to pay air passenger duty. Although only affecting a tiny number of people and raising a tiny amount for the exchequer, it is important symbolically for the Chancellor to show the wealthy are not immune from the economy’s woes. Of more importance, although less easily translated into headlines, are the measures to clampdown on tax avoidance. This will be achieved partly through tougher rules on so-called ‘non-doms’, and also by implementing various recommendations of the Office of Tax Simplification by effectively removing certain tax reliefs, for example preventing groups of companies using intra-company loans or derivatives to reduce their tax bills.

 

Opinion

 

“I liked the announcements on Apprenticeships and Enterprise Zones in particular as they will have a very real impact. This was a solid budget, largely in line with expectations given the limited room for manoeuvre, but it was also a clever budget which packed a lot in whilst remaining fiscally neutral. George Osborne has managed to shoot quite a few foxes without using up too much ammunition. I expect business to welcome it especially given the good news on Corporation Tax and added help for small businesses.” Angie Bray MP (Conservative, Ealing Central and Acton)

 

“A principled Budget rather than a crowd-pleasing one.” Robert Peston, BBC

 

“We needed a budget for growth to help families and small businesses. The Chancellor has given us that. People all over the country will be particularly pleased about the increase in the personal allowance, helping people’s personal finances in difficult times. Exactly the opposite of what Labour always did.” Senior Conservative Backbencher