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Well? What did you expect? Tax cuts?
by David Whiscombe
Surrounded as he is by the smouldering wreckage of New Labour's economic policy, Alistair Darling puts one more in mind of the Chancellery than the Treasury; and conjures up visions of Eva Braun as much as of Gordon Brown. The instant reaction is to feel some sympathy for a man who was passed the poisoned chalice of the Chancellorship just a couple of months before the Northern Rock debacle and for whom political life has been downhill ever since. But then one recalls that Mr Darling is one of only three people who have been members of the Cabinet right through from 1997; so perhaps he may not be entirely blameles...
Just a year ago, Mr Darling was predicting that public borrowing in 2010/11 would be around £38 Billion. The current forecast is around £175 Billion – some 12% of GDP. In 1976, when Dennis Healey crawled cap-in-hand to the IMF, the deficit was a massive…er... 6% of GDP.
Against that background, Mr Darling's options have been as limited as those of anyone else whose expenditure is increasing and whose income is dropping: you try to increase your income (raise taxes); you cut your outgoings (cut public expenditure) or you borrow more (if you can and provided you don't expect still to be in government when the chickens come home to roost). So what's he done?
First, recall that future personal tax increases have already been announced in last November's pre-Budget report, including a restriction of the basic personal allowance if you are rash enough to earn over £100,000 and its removal altogether if you earn over about £113,000. The PBR also proposed a new 45% rate of Income Tax on income over £150,000: there has been mounting independent evidence that the yield would be much less than the Treasury think and the Chancellor's response has been to increase the rate to 50% and to bring it in a year earlier! Couple that with the NIC increases already announced and we reckon that someone earning £200,000 (which in our book counts as successful rather than super-rich) will now see his tax bill rise by almost £9,000 between 2008/9 and 2011/12. In our view that will give out a clear message to wealth creators ("Not Wanted Here") which risks having a damaging effect far outweighing the fiscal benefit of the few hundred million pounds which the measures will raise from a relatively small number of people.
To add insult to injury, if you are fortunate enough to be driving a very expensive company car, time has been called by the Chancellor: the £80,000 cap on list price for computing the employment income "benefit in kind" charge will be removed from 6 April 2011: so you still have time to trade in that Bentley for a milk float.
Accumulation of private wealth (or what sane people refer to as "savings") has long been an anathema to the Government, and that extends to private pension funds. Remember that in 1997 the UK's private pension sector was regarded as the healthiest in Europe; the most memorable act of Mr Brown's very first Budget was to take £5 Billion a year from it. Even so, at a time when there is now increasing unease at the gap between "gold-plated" public sector index-linked pensions and the shrinking value of pensions in the private sector, the proposal to restrict tax relief for pension contributions for those earning over £150,000 a year while leaving public sector pensions untouched might be seen to be either bizarre, crass and unfair; or alternatively a pretty clear indication of which sector of the population the government regards as its primary constituency. Although the new limit doesn't bite until 2011, complex rules will counter any attempt to anticipate the new limit by making unaccustomedly large contributions on or after Budget Day.
Any good news? Not much more than crumbs. The carry-back of losses (limited to £50,000 a year) will last for two years rather than the one year originally proposed in the November Pre-Budget Report: for the current tax year there will be a modest acceleration of tax relief for capital expenditure on machinery or plant in excess of £50,000: and the temporary uplift to £175,000 in the Stamp Duty Land Tax threshold for residential property will now last until the end of the year.
As some commentators have observed, the interesting point will be the approach of the Conservative opposition to these measures, particularly the ones which will not come into effect until after the change of government which is now looking inevitable. Will they adopt the changes or pledge to reverse them? Uncertain times and uncharted waters.
David Whiscombe is Director of Taxes at Berg Kaprow Lewis LLP and a member of the UK200 Group Tax Panel
