Darling can’t afford a nakedly political Budget

Deteriorating government finances have tempered expectations for tax relief;
some businesses question how seriously a spring Budget speech should be taken
just months before a possible general election; the Conservatives have already
said they would review every budgetary decision within 60 days if they win the

Controversy surrounds the forthcoming Budget but most acknowledge the country
could do without naked politicking when chancellor Alistair Darling delivers his
Budget speech in the Commons, widely rumoured to be on either 17 or 24 March.

ONS figures indicate that 2010 was the first year, since records began in
1993, during which the government had to borrow in January – until now
considered a bumper month for income from tax receipts. A break-up of figures
reveals receipts from income and capital gains tax plummeted 11.8% year-on-year
forcing the government to borrow £4.3bn.

Anecdotal and survey evidence suggests SMEs are particularly troubled by the
Treasury’s stated plans to hike National Insurance (NI) contributions from April
2011 by 0.5% for those earning over £20,000 a year. The CBI and Federation of
Small Businesses (FSB) were both nonplussed when it was announced in the
December pre-Budget report. Businesses also think the wider tax structure must
be simplified in order to maintain the UK’s competitive advantage.

Nearly 58% of small businesses surveyed in an FSB-ICM poll say UK taxes have
prevented them from taking on more staff. Businesses in the South East feel
particularly strongly, with 64% saying taxes have a negative impact, followed by
the North West (60%) and London (59%).

Concerned that a temporary boost to employment figures provided by the
Christmas period is coming to an end, the FSB is calling for a freeze on NI
contributions and a NI rebate for small businesses with fewer than 50 staff
(that take on more employees) during 2010/11.

Conditions for obtaining credit are seen as improving, according to various
studies. Most recent of those comes from Engineering Employers Federation (EEF)
– the manufacturers’ lobby group. It found in February that a quarter of
companies surveyed sought finance for working capital in the past two months,
with 58% securing all they needed and 32% obtaining some of the finance they

An enhanced working capital leading to more medium or long-term jobs, backed
by lower NI, would be a no brainer. However, the call is perhaps more in hope
than expectation.

Lee Hopley, EEF’s chief economist, feels evidence that credit constraints
have started to calm down will help build some confidence across the wider UK
economy. She believes businesses understand that difficult decisions have to be
made to tackle the burgeoning budget deficit.

“EEF would like to see a deficit reduction and recognises the need for it.
Businesses would rather not see a rise in NI. If such a rise is inevitable, then
the chancellor could also use the opportunity to spell out some alternative form
of help or concession for businesses operating in such trying times. In an
election year the opposition parties should do likewise,” she said.

Most in the City feel a “phoney” Budget is on cards. As the election looms,
political debate over spending plans, when and by how much to cut the deficit
has descended into a confusing farce. Businesses increasingly see both Labour
and the Conservatives trading verbal blows of equally calculated vagueness. Of
late, the only politician who has emerged with his reputation enhanced is
Vincent Cable, Treasury spokesman for the Liberal Democrats – a party no one
feels has a chance of forming the next government.
A cynically political Budget may spook the markets, hit the pound and perhaps
increase the possibility of a Conservative landslide rather than a hung
parliament. The City feels opposition parties and even the chancellor have
sympathy for wider market fears, but PM Gordon Brown is not listening. Indeed,
for forecasting the worst recession in 60 years in August 2008, the chancellor
told Sky News that the “forces of hell” were unleashed on him by some in the
PM’s office.

Alan Clarke, economist at BNP Paribas, who described the PBR as a political
stunt littered with landmines for the Conservatives, believes another political
Budget would be an unsurprising travesty but not one that Darling would be
comfortable with. He feels the Treasury needs to make at least 4% in efficiency
cuts over the next two fiscal years totalling £25bn per annum. The IFS has
called for £76bn in cuts over two years.

“Should businesses take the Budget speech seriously so close to an election?
Probably not. Sitting well with the austerity posture, some cuts will come.
Conservatives are highly likely to increase VAT should they form the next
government. Perhaps, Darling might attempt to steal the Conservatives’ thunder
by announcing a 2010/11 VAT hike of his own,” Clarke said.

Faced with the largest peace-time budget deficit in UK history, with
government borrowing tipped to cap £178bn, few businesses expect tax concessions
– whether it is a phoney Budget in spring, or a pragmatic review of it by a new
government in the summer.


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