What can we expect in the pre-Budget report?

The 2008 pre-Budget comes at an interesting – and crucial – time. The American credit crunch of 2007 has mutated into a global financial crisis that has already pushed several economies into recession and is likely to hit more going forward. The UK is potentially already in a recession, job losses are mounting and the credit squeeze on banks shows no signs of letting up.

As a result, the chancellor Alistair Darling is largely expected to introduce a host of measures to help steer the economy through the downturn and support households and businesses.

But fiscal measures to “artificially” prevent the recession from running its course could in the long-run result in economic instability – including rampant inflation – for several years, warns Gavin Oldham, chief executive officer of The Share Centre.

Despite this concern, tax cuts are likely to be on the cards. The government has hinted that a £15 billion giveaway is needed in order to stimulate the economy, and this includes reducing the financial pressures on households to get them spending again.

Bill Dodwell, head of tax policy at Deloitte, says he expects Darling to focus on growth forecasts as well as tax, spending and borrowing figures for the current and next financial year.

But he doesn’t expect significant tax cuts: "There has been considerable speculation about tax cuts, to aid the UK economy. We doubt the chancellor will propose any form of general tax cut, such as a cut in the VAT rate, since that sort of measure is very costly and does not target those who most need help - lower earners, those on benefits and smaller businesses.”

Instead, Deloitte expects Darling to unveil targeted measures helping these groups such as more generous personal allowances, benefit rates and national insurance rates.

While some taxpayers may be holding out for tax cuts, Oldham warns that any excessive government response to the economic downturn could have a negative impact if it differs too significantly from the approach taken by mainland Europe.

“While we see a strong case for lower interest rates to combat deflationary influences over the next six to 12 months, we do not support a significant unfunded fiscal stimulus, which might incur the risk of a run on sterling beyond its current weakness in due course,” Oldham explains.

Oldham also calls for new regulations on banks to include a commitment to sustainable lending, to prevent a return to seemingly imprudent lending levels of 2007.

Consumer watchdog Which? says Darling should use the pre-Budget to launch an independent review of the banking sector. It also wants to see the banking reform, with consumers at the heart of the new system.

As well as helping consumers, Darling is also under pressure to offer a helping hand to smaller businesses hit by the ongoing credit squeeze and pending recession.

Dodwell says: “Smaller businesses affected by the current challenging market conditions may also be offered a lifeline of sorts by the chancellor. This could include a deferral of tax payments, or the introduction of a three year loss carry-back, allowing businesses with current tax losses to claim a repayment of tax paid in previous years.”

A cut in VAT is being tipped as one possible measure that the chancellor will unveil in his pre-Budget report. With an objective to get the economy moving again, Darling is thought to be planning to reduce VAT by 2.5% from 17.5% to 15%.

Douglas McWilliams, chief executive at the Centre for Economics and Business Research, says a temporary cut in VAT would meet the government’s three objectives – it is reversible, won’t distort the economy too much and would have a desirable short-term impact of boosting the economy.

Cuthbert agrees that VAT should be cut from 17.5% to 12% to encourage households to spend.

With the housing market remaining depressed, with extremely low levels of activity and no signs of any improvements, some pundits have called for the government to encourage buyers by amending stamp duty levels.

Accountants and business advisers, PKF, says temporarily raising the level at which stamp duty is payable to £1 million for residential properties should help kick-start the housing market again.

Marios Gregori, tax director at PKF, says: “Raising the stamp duty threshold for one year will make buying a house in 2009 a much more attractive option for many - and the knock-on effect of stimulating an area of the economy that is desperately struggling is obvious.”

How likely such a measure is remains to be seen. In September the government increased the stamp duty threshold by £50,000 to £175,000 for one year only. Although the measure does appear to have resulted in some pick-up in activity, experts say a lack of confidence and a lack of mortgage finance remain the biggest barriers to home ownership.

Another proposed measure to boost the housing market is the re-introduction of Mortgage Interest Relief at Source (MIRAS) scheme for basic rate taxpayers. Between 1983 and 2000, this scheme enabled borrowers to get tax relief on mortgage interest.

Gregori says introducing a similar scheme for first-time buyers could make mortgages more affordable.

Another suggesting to help homeowners is increasing the amount of rent you can earn from a room before you have to pay tax from £4,250 to £8,000. Malcolm Cuthbert, managing director of financial planning at Killik & Co, says this would help distressed householders particularly in London and the South East generate additional income without being taxed.

Although many experts agree that the housing market should be a focus on the pre-Budget, others argue that the report is an opportunity to boost the economy by making it more attractive for people to save and invest.

Stephen Haddrill, director general of the Association of British Insurers, calls for ISA limits to be increased from £7,200 to £10,000 a year. He also urges the government to bring forward the implementation of auto-enrollment into workplace pensions by two years (from 2012 to 2010).

“Savings are vitally important to the UK economy, and while we support the need to stimulate spending and growth, saving must not be ignored as a means of lifting and keeping the economy out of recession," Haddrill explains. "Saving is the lifeblood of financial services – it widens the availability of credit and stimulates investment in other sectors of the economy.

"The government has a golden opportunity to boost workplace pension saving by enabling automatic enrolment now. The pensions industry, employers and the rest of the private sector is ready to deliver auto-enrolment as soon as the green light is given."

What’s on your pre-Budget wishlist?

* Gavin Oldham, chief executive officer of The Share Centre, calls for measures to encourage people to save. These include:

1. A one-year relief from taxation on all cash deposit balances up to £250,000
2. Increasing child trust fund payments to £300/£600 and index linking to earnings in future years
3. Increasing the ISA allowance to £10,000 and index linking to earnings in future years
4. Introducing a workplace ISA, and new personal share incentive plans, which employees can open if their employer does not provide a group plan
5. A plan for the abolition of stamp duty on share dealing should be published
6. General financial education in the workplace to be an expense free from tax (both corporate and employee)
7. An end to compulsory annuity at 75, allowing pensioners to keep more of their funds invested in the market.

In terms of wider fiscal measures, Oldham calls for increased personal taxation thresholds to double the rate of inflation and allowing energy saving home improvements to be offset against income tax. Finally, he urges Darling to review public spending and announce an investigation into the “unaffordability” of public sector pensions.

* Malcolm Cuthbert, managing director of financial planning at Killik & Co, suggests lowering the standard rate of national insurance contributions to 5% for weekly earnings between £105.01 and £770. He argues this would encourage consumer spending.

In addition, Cuthbert calls employers’ national insurance contributions to be cut to encourage businesses to take on more employees – or at the very least not make redundancies.

Other tax measures that Cuthbert would like to see in this year’s pre-Budget include scrapping the £1 million cap on capital gains tax for entrepreneurs and reducing the small companies corporation tax rate from 21% to 12.5%.

Finally, he calls for income tax relief of venture capital trusts to be pushed up from 30% to 40% to encourage investment in higher risk companies.

Help for lower income households could include more generous personal allowances, benefit rates and national insurance rates.

* Stephen Haddrill, director general of the Association of British Insurers, wants to see the ISA limit raised from £7,200 to £10,000 a year.

He says this will give people even more incentive to save, as their nest eggs will be protected from the taxman. Raising the limit will also help boost investment in the stock Haddrill adds.

In addition, the ABI calls for automatic enrolment into workplace pensions to be brought forward from 2012 to 2010. The trade body estimates that bringing forward the implementation of automatically enrolling people into a pension through their employer by two years could boost long-term savings by more than £500 million.


Your Comments

With the cost of oil down to 48 dollars per barrel the cost of petrol
and diesel should be down to less than 50 pence per litre.
or are the multi's rubbing their hands at our indecision over the matter.
Hope the goverment steps in to help us.

Dear Sir,

As the Managing Director of a small Aluminium Die-Casting Foundry I find the tax relief on capital expenditure the largest obstacle to my business.

We have down sized our spend from £120000 per anum to £50000 directly as a result of capital tax allowance changes.

I am also concerned about the compulsary pension contributions by employers soon to be introduced. By my initial calculations, I will need to shed one full time job to offset the effect on my company.

We are considering wether relocation to Ireland would be economically advantagous or not, in view of their taxation system.

As a maufacturing company, with exports of £500000 a year we feel that we are regarded as an unnecessary evil by this government.

I am also concerned about the compulsary pension contributions by employers soon to be introduced. By my initial calculations, I will need to shed one full time job to offset the effect on my company.blueoo.com