Budget 09: the wrong way

The key question for this Budget was whether the chancellor would set out a
credible and rigorous path to sustainable public finances. The CBI’s view is
that he did not.

Although he did not opt for another sizeable fiscal boost, in recognition
that the public finances could ill-afford this, he failed to reassure business
with his plans to restore the public finances to health.

To most observers, including the CBI, the chancellor’s forecasts look on the
rosy side, with a rapid end to the recession and well above trend growth from
2011 to 2014.

A lot will have to go right for these numbers to work, and much will depend
on how far the government can deliver on its plans to reduce public expenditure
growth. Even so, the chancellor expects the books to be balanced by 2018, two
years later than previously planned.

With annual bond issues expected to exceed £200bn and debt doubling by 2013,
pushing out the horizon for balancing the books is risky, not least in
attracting investors to finance UK debt.

That said, there were some worthwhile measures on the fringes of this Budget,
which will help relieve pressure on struggling businesses in the short-term.

The doubling of investment allowances this year is welcome, and the targeted
trade credit insurance ‘top up’ scheme should provide relief for firms facing
short-term working capital constraints. The time-limited car-scrapping scheme
will give the auto industry a long-awaited boost.

On foreign profits, news that the dividend exemption will be included in the
Finance Bill 2009 is welcome, and delaying the implementation of the worldwide
debt cap implementation until 2010 makes sense, as it will allow for further

But changing the higher-rate tax relief on pensions weakens incentives to
save for retirement is yet another change to a system that needs stability. It
is also disappointing the chancellor stayed silent on next year’s planned incre
ase in NI contributions for employers, and that he didn’t reverse policy on
rates on empty properties. Reversing these measures would have cut the cost of
doing business and supported jobs at time of rising unemployment.

The sooner we face up to the huge challenge of the return to fiscal health,
the better. That will mean tough calls on public service reform if we are to
avoid hefty tax rises that will undermine our competitiveness and smother the
fragile recovery.

Ian McCafferty, CBI chief economic

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