After a nightmarish winter, where his handling of the Northern Rock crisis,
capital gains tax and non-domiciles met with belligerent criticism from
business, Alistair Darling has an opportunity to repair the damage when he
presents his maiden Budget next week.
The chancellor went some way to rebuilding City relations by finalising the
Budget date of 12 March in January, giving business and advisers more
preparation time than was the case during Gordon Brown’s time as chancellor.
Unfortunately for Darling it is going to be more difficult to sustain the
good feeling on Budget day itself.
Economic growth is expected to slow from 3% to 2% in 2008 and as a result
experts are expecting corporate tax receipts to come £3bn below the £50bn
forecast. North Sea tax receipts and stamp duty are also expected to fall short
Analysis by PricewaterhouseCoopers suggests that by 2010 the gap between tax
revenues and forecasts could be as much £8bn.
Yet the predicted drop in tax take is unlikely to have an impact on public
spending and government borrowing.
The comprehensive spending review has budgeted annual increases in public
spending of 2.1% for the next three years.
With regards to lending, government has already been forced to increase its
debt forecasts for 2008/2009 from the £30bn budgeted in March 2007 to £36bn by
the time of the 2007 October PBR.
Some experts believe borrowing could be as high as £42bn for the 2008/2009
year. It all means that Darling is going to have to find ways to raise tax
Here are Accountancy Age’s predictions about how Darling may go
about doing that.
Prediction: increasing vat
The VAT rate of 17.5% hasn’t changed since April 1991 and lags the rates of
other EU countries, providing the chancellor with a reason to make an increase.
Likelihood: possible, but improbable
Increasing VAT will raise a big chunk of money and bring the UK into line with
the rest of Europe, but is Darling, still bruised from the non-dom and CGT
bashing, up for defending another unpopular change?
A less controversial move could be to shift certain items in the zero-rate band
up to the 5% band. This will raise some extra tax without kicking up too much of
Prediction: tinkering with national insurance
Darling could increase the national insurance contributions of employees earning
more than £40,000 from 1% to 2% of earnings, netting big sums for the Treasury
in the process.
Likelihood: very possible.
The move will upset higher earners, but it will not add to inflation in the way
that a VAT increase will and it will leave most people unaffected. Darling could
also try and increase the rate of employer NI contributions. The UK rate is
lower than France, Spain and Germany, so there is an excuse for upward revision
Prediction: windfall tax
Electricity and gas suppliers have been reporting bumper profits while consumers
have had to suffer rapidly increasing energy costs.
Brown caught the North Sea oil industry with a windfall tax. Darling may follow
Likelihood: outside chance
Again, there is tax to be raised by this measure, but it will cause fury among
gas and electricity suppliers and the actual costs could filter down to
consumers eventually anyway. Of course, no-one thought Brown would levy a
windfall tax when he did, so don’t rule it out.
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