BUDGET PREVIEW - A Budget for the General Election

Chancellor Kenneth Clarke must be feeling the burden of expectation weighing down on his shoulders as he prepares next Tuesday’s Budget speech.

His party expects and the nation expects.

Conservatives are seeking a financial package to turn around dismal opinion poll ratings and secure an against-the-odds victory at a General Election which has to be held within the next six months. The public eagerly awaits the tax cuts promised by Clarke (who is committed to a 20% basic rate) and predicted by the pundits.

Stacked against that is Clarke’s well-documented desire to be seen as a ‘prudent’ Chancellor and the knowledge that any measures might be swiftly reversed by an incoming Labour administration.

Time tells all, but Accountancy Age has compiled a guide to what the profession’s leading pundits believe will happen on the big day.

Most argue that the Chancellor will find a cut in the basic rate of income tax (currently 24%) too hard to resist for its potentially revitalising political effect. But all agree that Clarke will not be able to go beyond a 2p reduction.

Another popular opinion is that a headline-grabbing penny cut might be married to a widening of the lower rate (20%) band or an increase in personal allowances. Alternatively, any cut could be replaced by both greater band and allowance widening.

John Hawksworth, head of Coopers & Lybrand’s macroeconomics unit, favoured the latter approach. ‘Both of these types of tax cuts can be presented as giving greater help to the least well off than a basic rate cut, which does nothing for those beneath the basic rate threshold,’ he said.

‘And they have the advantage of being able to be administered in relatively small, and so cheap, doses – whereas basic rate cuts come in lumpy 1p slices which cost u2bn a time in a full year.’

If cuts come they will have to be paid for. Political pressure will again bear down on Clarke, who will try to avoid hitting the taxpayer’s pocket directly.

Areas likely to suffer are the increasingly popular profit-related pay schemes, dividend tax credits on pension funds and VAT avoidance schemes.

Several experts also forecast a rise in insurance premium tax, unlikely to be passed on to consumers because of strong competition, and air passenger duty.

Ernst & Young’s national tax partner Douglas Fairbairn explained: ‘Clarke is going to have to try to balance the books. The public finances are too weak for him not to increase revenue.

‘So he is likely to target unpopular groups or raise less visible taxes.

There will be no repeat of VAT on fuel with an election around the corner.’

Kidsons Impey’s national director of tax services David Harrison added: ‘He hasn’t got a lot of cash to play with. It’s going to be a case of the left hand giving and the right hand taking away.

‘But I’ve a feeling that he’s going to pull a rabbit out of the hat.

It may be the total abolition of capital gains tax and inheritance tax in two years’ time if circumstances permit.’

Other likely changes include the formalisation of the three-year rule on VAT repayments, while small businesses could benefit from a rise in the VAT registration threshold. The small companies corporation tax is likely to keep pace with basic rate income tax.

Clark Whitehill tax partner Mark Lee summed up, backing Harrison’s theory: ‘It’s going to be a short, sharp Budget with limited headline-grabbing ideas, but there will be one revolutionary proposal – but I just don’t know what it’ll be.’

The Budget predictions given below are a sample of major firms’ thinking