What should we expect from Budget 2002?

Having already announced the ‘BBC Budget’ and a follow-up, in which Brown reannounced his intentions for smaller businesses, the sands of time are running down until out comes his new briefcase and we once again have the Budget ‘proper’.

But there is the small matter of the Treasury looking to raise £5.5bn to subsidise the NHS. It is widely expected the rates of national insurance and/or the basic rate of VAT will increase.

The rate of 17.5% has remained unchanged since 1991. But it may be pushed up to 19% or 20% to put the UK in the middle of European rates. These vary from 15-25%. This move alone would raise more than half of the amount needed and, from a political viewpoint could be presented as aligning the UK with a mean European rate.

Additionally, the rate of NI may be altered, and has already been tweaked under Labour. One possibility may be raising the ceiling on the cap to expand the number of people paying the top end rate from £28,000 to £34,000.

An increase in the basic rate of income tax – which has not been raised since the 1970s – is unlikely as it would mean the government u-turning on its manifesto.

With the recent rise in oil prices, we are very unlikely to see any large, if any, hikes in the tax on fuel. Not only would the move prove very unpopular, the government would possibly run the risk of another demonstration by road users as last seen in 2000.

If a slight increase were to be implemented, the message would surely come wrapped up as an environmental tax, and hence, any effect would be felt on non-green fuels such as diesel.

A levy may be placed on European air travel – a move that could spell the end of cheap short-distance flying. It is currently cheaper to fly to Brussels or Paris from London than travel by train because train operators have to pay tax on their diesel, but flight operators don’t have to pay a tax on kerosene. Effectively they are receiving a fiscal subsidy.

However, there is the danger if this happens, some cheap airlines may go bust, or the hub of European air travel moves out of the UK to somewhere like Amsterdam. Additionally, one assumes a uniform rate airline fuel tax would be introduced Europe-wide.

Similarly, another measure likely to be viewed sympathetically would be the introduction of a 10p charge made to supermarkets on carrier bags – a cost which could be passed on to the consumer – as seen in Ireland over the last month. Again this tax could be dressed up as a green tax.

The Treasury has seen a dip in the amount it receives from tobacco tax, due to the increase in bootleg products, so it is unlikely this rate will increase.

The same theory can be applied to alcohol. But it cannot be seen to lower the taxes as this would send out the wrong health message.

Additionally, with the housing market showing no sign of slowing, stamp duty may be put up in an attempt to dampen the market.

For an outside bet, it may be worth considering the introduction of VAT on children’s clothing or food. But both would affect low income households, a move which would buck the trend of the government which has been careful so far in taking from the middle-income households and handing to the lower paid brackets.

Either move is unlikely but both will be considered as the funding of public services continues to dominate the political – and media – agenda.

WHAT THE EXPERTS SAY …

TENON HEAD OF ECONOMICS MAURICE FITZPATRICK ‘If Gordon Brown wants to raise say £5.5bn per annum extra to put into the NHS, he could consider raising VAT from 17.5% to 19%. This would not be in breach of Labour’s general election manifesto, which so far as concerns VAT merely committed Labour not to extend VAT to such items as food.

‘Such a VAT rise would raise inflation, we estimate by about 1%. But this may be helpful in terms of potentially enabling the Treasury to make a positive assessment of Gordon Brown’s five tests which will determine whether we can join the euro.’

KPMG TAX TEAM

‘With the surplus of the government’s first term running down, the focus of this year’s budget will be public finances. The position in the coming financial year looks reasonably comfortable, but if public spending continues to outpace GDP growth into the medium term, government borrowing or tax revenues need to rise.

‘Some measures will probably be announced this April but the bulk of any tax increases is unlikely to come through until 2003-04. Expectations centre on changes to the national insurance regime (for example, aligning the upper earnings limit with the higher-rate income tax threshold would raise almost £1bn) and possibly higher VAT (a 1% point increase in rates would yield some £31.5bn). With changes to income tax rates ruled out, the scope for raising significant extra revenues from this source is limited.’

JOHN WHITING, PARTNER AT PRICEWATERHOUSE-COOPERS AND CIOT PRESIDENT

‘If Mr Brown is really going for the tax raising stakes, the form horse has to be national insurance, with standard rate VAT coming up on the rails. Ridden carefully, these could bring him substantial winnings but he’ll have to negotiate the Beecher’s Brook of public opinion on both of them.

‘Safe bets would be the widening of the 10p in the pound income and corporate tax bands, and likelihood that he will leave other income tax rates unaltered.

I suspect the going is being checked to see if it will support petrol duties rises but tobacco and alcohol duty rises should be left at the starting gate.

Longer shots are a corporation tax rate cut and an increase in stakeholder pension limits.’

DELOITTE & TOUCHE LONDON TAX PARTNER PHILIP RIDGWAY

‘One option might be to raise the level of national insurance contributions.

Raising the upper earnings limit from £30,420 to align it with the higher rate income tax threshold, which is currently around £34,515, would raise approximately £0.9bn. But this would hit ‘middle England’ and is therefore considered an unattractive option. If instead the upper earnings limit were to be abolished altogether, this would raise £5.9bn. It wouldn’t break any manifesto pledge and would hit higher earners harder than lower earners.

‘A tax that might be increased is stamp duty. The UK has lower rates than some EU countries and an increase is likely to dampen the housing market.’

ERNST & YOUNG

‘The majority of the measures to be included in the 2002 Budget have already been announced in the pre-Budget report and the detail has been reported in some consultation documents. It seems likely that the government has decided the recent publicity given to the state of public services gives them a rare opportunity to raise taxes, without losing the support of the electorate. That the announcements are being referred to in advance suggests the government is letting us down gently by setting our expectations so far in advance that when the increases are announced in the Budget they will be old news.

‘The Budget no longer seems to be as exciting as it once did so the ‘will they, won’t they’ surrounding the tax increases may be the start of something!’

BILL DODWELL, TAX PARTNER AT ANDERSEN

‘The issue of raising additional funds for the NHS tells us the only way to raise this revenue is through direct taxation. Additionally we will see the introduction of new employment and pensioner tax credits.

We will see an incentive for the unemployed with children who move into employment for the first time, receive an incentive for the first time.

‘Also we will see pensioners finally receive an income guarantee. The government has been talking about this for a long time, and it looks likely to kick in next year. But we don’t expect any changes to the VAT rate.’