The latest Green Budget – more formally known as the pre-Budget report – has come and gone. It’s Gordon Brown’s sixth – a commanding lead over other chancellors (hardly surprising as he invented them!).
So how are PBRs contributing to the running of the economy and, in particular, the tax system?
The PBR acts as the interim report of UK plc in many ways. Like any company, one shouldn’t have to go for a full year before the CFO tells us how the finances are doing. The PBR works well as a time to take stock and update on forecasts and results.
Meanwhile, the development of the tax system is helped by the PBR in that it is a focal point for progress reports on consultations, announcements of new initiatives or studies and early setting of allowances.
Now don’t get me wrong – I’m not suggesting we need more occasions where tax changes can be announced – the chancellor seems to have 365 days available to do that already. But any event that encourages consultation and properly-staged changes to our creaking tax system, and reduces the risk of sudden major shifts being imposed, has to make sense.
So how do things look now that Brown has released his trusty PBR steed for another outing?
The UK’s economic position isn’t as good as predicted in the April Budget.
The forecast we heard then of growth of 2-2.5% in the economy this year is a fond memory rather than reality. The chancellor needed to be realistic with his update on the economic figures. But even if absolute growth isn’t that good, we do have low inflation, low interest rates and relatively low unemployment. And Gordon’s long-time friend Prudence has made sure there are some reserves around to help.
There are also clouds around. Pension funding is a worry for many (including the Treasury); there are some significant pay demands; and the stock market remains shaky. If the economy is slowing, that means less tax revenues – corporation tax revenues in particular are falling.
We are getting reacquainted with the phrase ‘tax and spending’. Brown has been honest enough to stress that if the country is going to spend more money on the NHS and education, the money has to come from somewhere.
And unless he has found the magic money well that some believe exists in Whitehall, that means increased taxes or borrowing.
The hike in national insurance contributions from next April is set to raise an extra £8bn or so – about 2% of total tax revenues. There is also a contribution from the freezing of the basic personal allowance.
But even if Brown feels the UK economy is not doing terribly well and gaps are appearing in his arithmetic, he can probably plug those gaps with borrowings, all of which should still fit into his ‘golden rule’ of only borrowing to invest over the cycle.
In any event, further tax rises in due course cannot be ruled out though one has the feeling it’s something the chancellor would rather avoid.
The chancellor certainly seems in no danger of running out of new ideas on the tax front. The ‘big idea’ in the pipeline is the new tax credits regimes starting next April. There is some £2bn plus extra on top of current tax credit figures already earmarked as available to those who can struggle through completing the relevant forms. I do often wonder if turning us into a nation where 90% of families are on, what seems, means-tested benefits is really a good thing.
As always there are also many other things ‘in progress’. Measures to encourage enterprise are always welcome though determined attacks on the red tape inherent in the employer’s role might pay more dividends. The oil industry will welcome abolition of royalties on North Sea production as a way of evening the balance for the extra tax they were hit with in the April Budget.
PBRs have to rank as a ‘good thing’, if only because they allow tax anoraks to come out of the cupboard a second time each year.
But they play an increasingly important part in the way our fiscal landscape is shaped and, in my book, anything that means more openness and consultation has to be good. So, although the event doesn’t have the pizzazz of the main spring Budget, I, and I suspect many others, were listening with keen interest yesterday.
- John Whiting is a chartered tax adviser and tax partner with PwC
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