We all want to see sound public finances and a strong private sector. That
would open up the prospect of reduced tax rates, creating a virtuous circle as
the economy became stronger and more competitive. The government would like to
achieve that too. Sadly, the Budget does not set the right course.
No-one denies that the public finances are in a bad way, with record deficits
and huge total borrowing. We all know that the remedy for any debtor is to bring
income and expenditure back into balance. But that leaves the debtor with a
choice: cut expenditure or increase income, or a bit of both. The government’s
income is taxation. Increasing that will damage business, slow the recovery and
deter international capital from coming to the UK.
The government has not bitten the bullet. The only sound way to restore
health to the public finances would have been a real-terms freeze in public
spending growth, once the recovery was under way. Realistically, that freeze
would have had to last for more than the life of the next Parliament.
Instead, the government has decided to rely on a mixture of reduced growth in
spending – down to 0.7% in real terms – and increased taxation. The tax policy
measures that are announced in the Budget give a net reduction in tax in
2009-10, are broadly neutral in 2010-11 and then increase tax revenue by £5bn in
2011-12. This is on top of previous announcements, such as the extra £5bn that
will be raised through the increase in national insurance rates from 2011
onwards. The government has also crossed its fingers and predicted strong trend
growth of 2.75%, justifying a prediction of 3.5% growth in 2011. If, as many
economists fear, that does not happen, things will look grim indeed.
But it is not all bad news for accountants. Clients will need their help. it
will be important to use the temporary increase in the main capital allowances
rate, and the extension to three-year loss carry-back, efficiently. The new
anti-avoidance rules are going to create traps for the innocent but unwary. And
any clients with income of £150,000 or more who come up against the new
restriction on the effective rate of relief for pension contributions, or the
anti-forestalling provisions that take effect immediately, will need help to get
through the maze. Complexity in tax law is a bad thing. But in difficult times,
it will give some of us a little cheer.
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