Analysis - Is this the cappuccino Budget?

As such, Brown could well be compared to Admiral Sir John Jellicoe in the First World War – Jellicoe, as commander of Britain’s Grand Fleet being the man whom Lloyd George described as ‘the only man capable of losing the war in an afternoon’.

The analogy here being that it is conceivable a disastrously misjudged Budget could seriously damage Labour’s re-election changes although it has to be said this is not a chancellor whose record to date is notable for misjudgments.

There’s plenty of money in Gordon Brown’s war chest, if he chooses to spend it. Inflation is under control and interest rates are heading downwards.

But there is a slowdown in the US economy and that will raise concerns about trends being blown over on the usual prevailing Atlantic winds.

Tax cuts might also be seen to be stoking inflation and dragging in more imports rather than boosting savings or investment in the UK.

Despite a lot of argument, it is clear the tax burden in the UK has risen in recent years. We pay more as a percentage of GDP than we used to – around 37.7% (adding back working families tax credits) now as against 35.2% in 1996/7.

This translates to some £25bn extra – £12bn in 2000/01 due to Budget changes (£10bn next year), the rest due to oil price rises, fiscal drag, matters already in the pipeline (e.g., the abolition of profit-related pay) and general economic growth and change.

Most people won’t feel this increased burden – the economy has grown, real earnings have gone up and (importantly) interest rates have come down.

Additionally, many of the tax rises have been hidden – the so-called stealth taxes – classics being the loss of MIRAS (softened by reducing interest rates), the loss of dividend tax credits to pension funds (little understood by most people) and national insurance changes which cut bills for the lower paid but increase them for the better off (hard to argue with as a concept, but not the all-round tax cut that has been suggested).

It seems likely the March Budget will see some tax cuts. The question is probably ‘how much’ rather than ‘whether’.

The chancellor’s favourite girlfriend (with apologies to the new Mrs Brown) Prudence will always be whispering in his ear. Equally, there is his iron chancellor image to protect.

Income tax is bound to receive attention. Brown has the money to cut the basic rate from the current 22% to 20% (cost around #6 bn), simplifying as he goes.

That would have a certain attraction – after all, the Conservatives spent a lot of time saying that a 20% tax rate was their target.

The thought of Brown cutting the rate to 20% and then turning round and saying ‘see what a Labour government can do that the Conservatives never managed’ is faintly seductive.

But it seems highly unlikely that he will want to lay himself open to a charge of electoral bribery and will be arguing that he will retain more votes by continuing to walk hand-in-hand with Prudence.

An increase in the amount of income qualifying for Brown’s favoured 10% tax band seems the more likely option.

There will certainly be reiteration of spending plans – with a few bob extra thrown into the NHS in amongst it all.

No doubt there will be some fiddling with capital gains tax (again!).

The sin taxes of alcohol, tobacco and petrol will probably escape with only modest adjustments this time.

And there will be the inevitable headline grabbing rabbit out of the hat (remember the ‘grab-a-granny’ free TV licences for the elderly announcement?).

The result – about £3bn net cuts?

Overall, I see this as a cappuccino budget – a lot of froth, a few sprinklings of something sweet on top, but (to be fair) a good shot of reassuring solidity underneath. Cheers!

– John Whiting is a tax partner with PricewaterhouseCoopers and deputy president of the Chartered Institute of Taxation.

For up-to-date Budget coverage and links visit www.accountancyge.com/Tax/1117726

More on the Budget, Opinion, page 20 TEN MEASURES TO LOOK OUT FOR – 10% income tax rate band increased – Tobacco duty up modestly – VAT recovery for museums that don’t charge entry fees – Out with betting duty, in with betting profits tax – Extend last year’s research and development tax incentives – Pension fund reforms following Myners report – 40% income tax threshold up – slightly – Some form of encouragement for those doing voluntary work. – Corporate capital gains tax reliefs on share sales – Increase children’s tax credit to #10pw – in 2002. Some will no doubt feature – plus, just possibly, a timetable for getting to 20% basic rate income tax.