Monday 24 November 2008

pre Budget Report leaks and my thoughts

Today heralds the announcement of the pre-Budget Report. Darling is due to stand up this afternoon in the Commons to give details of his tax give away and the expected grim borrowing and growth projections.

I'm not sure why he's bothering, as I would have thought most MPs - like the rest of the public - could have read the budget report in the Sunday papers. This has to be the most comprehensive leaks of what is going to be in the budget EVER.

I can understand the tactical leaking of plans, especially if they are controversial, as a means of gauging the reaction of the press and the public at large. If your plans are shot-down, then you have the advantage of either denying the leaks, (and then ditching those plans), or amending them accordingly to make them more palatable.

But the leaking of the pre Budget report would appear to have little or no benefit. It's surely too late to rewrite the report once it is splashed about in the Sunday papers - the day before. All it has done is give the Conservatives and the Liberal Democrats advance notice of the contents such that they can provide a more considered response.


As for the details... well if we are to believe all of the Sunday papers, then Darling, sorry I mean Brown, is planning the following:

  • A cut in the rate of VAT from 17.5% to 15%
  • An extension of the stamp duty holiday on homes costing up to £175,000
  • An extension of the £120 rebate for basic-rate taxpayers through a rise in the personal tax allowance (this was introduced to 'compensate' the losers in the 10p tax fiasco)
  • A postponement on a planned one per cent corporation tax rise on the profits of small businesses
  • An increase in income tax rates for those earning over £150,000 per year from 40% to 45%

(There are more measures, but these are the significant economic ones. Some of the others appear to be gesture politics at their best e.g. buying back former council homes and 'measures' to ensure the banks pass on cuts in lending rates).


Let's deal with these one at a time.


VAT from 17.5% to 15%

The aim with the cut in VAT would be that it would incentivise people to spend now, prior to a likely increase in VAT later. My belief is that this is fraught with problems:

1: Businesses will face considerable costs in changing all their systems to account for the change in VAT rates. Simple businesses will find it easy, others will find it far more difficult. In addition all those 1000s of items will need to be repriced - that is, assuming the retailers pass on the savings. Are 'pound shops' going to suddenly change their prices to 97.5p? - unlikely.

2: It doesn't actually put any money back into people's pockets. To access the savings you have to spend money in the first place, and generally, the problem is that people are nervous of their future job prospects, don't have any money and actually need to pay back debt they've racked up during the last ten years. I'm not sure that it would have the desired fiscal stimulus. Most food is exempt from VAT as are children's clothes, newspapers, train fares etc.

The goods that will be affected are that new plasma TV that you were going to buy. So - instead of it being £699 including VAT it would now be £684... a £15 saving. Now if you were considering spending that much money, would your decision be affected by a £15.00 saving? Unlikely. Even on a £10,000 car, the saving would be about £220...

When the retailers themselves are having 20% off days, I think that this will have very little impact on anyone's spending plans.

And let's not forget, that it is highly likely that any additional spending will be on imports e.g. that plasma telly - and imports are going to be more expensive now anyway, owing to the weakness of the pound - note Sony's announcement earlier this week, that it is increasing prices after Christmas owing to the exchange rate movements.

Verdict: An awful lot of money to borrow to finance a tax cut that will have such a marginal effect.


Stamp duty holiday extension

Fewer are buying houses as they cannot access mortgage finance. As the rates on new mortgages taken out are now about 2% above base rates, this is going to do little to restart the housing market. The housing market will only recover when confidence returns.

Stamp duty needs to be completely revised as a tax. It is simply wrong that the rate is 1% up to £249,999 and then 3% on £250,000 and above. So if you were buying a property at £249,999, you would pay £2,499 in stamp duty. But if you bought a property at £250,000, you have to pay £7,500 in stamp duty.

If stamp duty has to be retained, and I believe that it is a major barrier to mobility in the economy, then it would surely be far more reasonable to have a graded tax - something like 1% on the first £250,000 and then 3% for values between £250,000 and the purchase price etc.

Verdict: Fairly cheap. Can't see much revenue being lost in the short-term owing to the fact that no one is buying property anyway. Tiny benefit as a fiscal stimulus.


An extension of the £120 rebate for basic-rate taxpayers

I have to agree with this. The abolition of the 10p tax rate for lowest paid was unfair and unjust. A permanent correction should be introduced.

Verdict: Fair and just. Will provide a small fiscal boost.


Corporation tax - delay in introduction of 1% increase in CT for small businesses

Incredibly marginal effect. Aids only small businesses making profits in the first place, and these enterprises are highly unlikely to change any investment decisions on the basis of such a small move. If your business had profits up to the maximum permitted to access the lower tax rate, then you'd save £3k per year in tax on profits of £300,000. That could probably just about pay for the changes to your systems to implement the VAT rate changes.

Does nothing to help small businesses that are not making profits.

Verdict: No measurable impact.


Income tax rates for those earning over £150,000 per year up from 40% to 45%

This is a deeply cynical and political move, and nothing do with economics whatsoever.

It is entirely engineered to neutralise the Tories' charge of a tax bombshell to come. Most people casually looking at the budget announcement would think, "Oh great, well those people that are 'rich' can pay for this." And that is Labour's intention - announce massive borrowing and imply they will 'soak the rich."

If this is announced this afternoon, it would be a bare-faced lie - and must be shot down by the Tories.

Raising rates of income tax on those earning over £150,000 per year would generate additional revenue (assuming those people didn't catch the next plane out) of £2bn. Sounds great. But the VAT proposal alone will cost £12.5bn, so there's a massive hole in the public finances which will need filling in after the election.

Verdict: No one should be under any illusion - taxes will rise in the next two years. And it won't be the rich who are paying it back. It will be everyone.


Janet Daley has an excellent piece in today's Telegraph. Her conclusion is simple, and I agree with it -

The Government is borrowing too much because it is costing too much because it is doing too much.

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