Darling can’t afford a nakedly political Budget

Deteriorating government finances have tempered expectations for tax relief; some businesses question how seriously a spring Budget speech should be taken just months before a possible general election; the Conservatives have already said they would review every budgetary decision within 60 days if they win the election.

Controversy surrounds the forthcoming Budget but most acknowledge the country could do without naked politicking when chancellor Alistair Darling delivers his Budget speech in the Commons, widely rumoured to be on either 17 or 24 March.

ONS figures indicate that 2010 was the first year, since records began in 1993, during which the government had to borrow in January – until now considered a bumper month for income from tax receipts. A break-up of figures reveals receipts from income and capital gains tax plummeted 11.8% year-on-year forcing the government to borrow £4.3bn.

Anecdotal and survey evidence suggests SMEs are particularly troubled by the Treasury’s stated plans to hike National Insurance (NI) contributions from April 2011 by 0.5% for those earning over £20,000 a year. The CBI and Federation of Small Businesses (FSB) were both nonplussed when it was announced in the December pre-Budget report. Businesses also think the wider tax structure must be simplified in order to maintain the UK’s competitive advantage.

Nearly 58% of small businesses surveyed in an FSB-ICM poll say UK taxes have prevented them from taking on more staff. Businesses in the South East feel particularly strongly, with 64% saying taxes have a negative impact, followed by the North West (60%) and London (59%).

Concerned that a temporary boost to employment figures provided by the Christmas period is coming to an end, the FSB is calling for a freeze on NI contributions and a NI rebate for small businesses with fewer than 50 staff (that take on more employees) during 2010/11.

Conditions for obtaining credit are seen as improving, according to various studies. Most recent of those comes from Engineering Employers Federation (EEF) – the manufacturers’ lobby group. It found in February that a quarter of companies surveyed sought finance for working capital in the past two months, with 58% securing all they needed and 32% obtaining some of the finance they needed.

An enhanced working capital leading to more medium or long-term jobs, backed by lower NI, would be a no brainer. However, the call is perhaps more in hope than expectation.

Lee Hopley, EEF’s chief economist, feels evidence that credit constraints have started to calm down will help build some confidence across the wider UK economy. She believes businesses understand that difficult decisions have to be made to tackle the burgeoning budget deficit.

“EEF would like to see a deficit reduction and recognises the need for it. Businesses would rather not see a rise in NI. If such a rise is inevitable, then the chancellor could also use the opportunity to spell out some alternative form of help or concession for businesses operating in such trying times. In an election year the opposition parties should do likewise,” she said.

Most in the City feel a “phoney” Budget is on cards. As the election looms, political debate over spending plans, when and by how much to cut the deficit has descended into a confusing farce. Businesses increasingly see both Labour and the Conservatives trading verbal blows of equally calculated vagueness. Of late, the only politician who has emerged with his reputation enhanced is Vincent Cable, Treasury spokesman for the Liberal Democrats – a party no one feels has a chance of forming the next government.
A cynically political Budget may spook the markets, hit the pound and perhaps increase the possibility of a Conservative landslide rather than a hung parliament. The City feels opposition parties and even the chancellor have sympathy for wider market fears, but PM Gordon Brown is not listening. Indeed, for forecasting the worst recession in 60 years in August 2008, the chancellor told Sky News that the “forces of hell” were unleashed on him by some in the PM’s office.

Alan Clarke, economist at BNP Paribas, who described the PBR as a political stunt littered with landmines for the Conservatives, believes another political Budget would be an unsurprising travesty but not one that Darling would be comfortable with. He feels the Treasury needs to make at least 4% in efficiency cuts over the next two fiscal years totalling £25bn per annum. The IFS has called for £76bn in cuts over two years.

“Should businesses take the Budget speech seriously so close to an election? Probably not. Sitting well with the austerity posture, some cuts will come. Conservatives are highly likely to increase VAT should they form the next government. Perhaps, Darling might attempt to steal the Conservatives’ thunder by announcing a 2010/11 VAT hike of his own,” Clarke said.

Faced with the largest peace-time budget deficit in UK history, with government borrowing tipped to cap £178bn, few businesses expect tax concessions – whether it is a phoney Budget in spring, or a pragmatic review of it by a new government in the summer.

Further reading:

eef.org.uk