This year’s Budget, which will be announced at 12.30pm on Wednesday 22 April, is set to be a tough one with downward revised economic forecasts, changes to tax and a host of measures to kick-start the housing market and help credit-crunched consumers.
As with every annual Budget, commentators and tax experts have given their predictions of what the chancellor Alistair Darling might pull out of his red briefcase.
The chancellor is expected to reveal that the economy will shrink by as much as 3.5% this year - a significantly worse outlook than the 0.75-1.25% slowdown forecast in the pre-Budget report.
He is also set to say that the recession will end this year and the economy grow by as much as 1% next year - figures which appear far more optimistic than those from the Confederation of British Industry and The Ernst & Young Item Club.
David Page, economist at Investec Private Bank, says: “We expect the Treasury to slash its GDP forecast to -3.5% for 2009. This would be the worst year for activity since 1945. We expect an official forecast of 1.5% to 2% for 2010 and above-trend growth thereafter. We are slightly more optimistic for 2009 (forecasting 2.5%), but are wary of above trend growth by 2011.”
Borrowing estimates are also likely to soar. The 2009-2010 public sector deficit is expected to rise to £150 billion from Darling's previous prediction of £118 billion, according to the Institute for Fiscal Studies.
In a statement, posted on YouTube ahead of the Budget, Darling said: "I want to make sure that we do two things. One is to help people now, through this difficult time. But equally importantly we've got to prepare for the future, to invest in Britain's future to ensure that we can take advantage of the upturn, of the recovery when it comes, and it will come... We have underlying strengths that we can play to and I want to build on those so there are jobs and good prospects for the future."
The weak economic outlook could prevent the Treasury from making any real changes to help consumers. Page says: “The scale of the deficits will constrain the chancellor’s hand for further large-scale fiscal stimulus. Instead, we expect a host of measures designed to provide micro support for the economy.”
The sluggish housing market is expected to be given a £1 billion boost in the Budget, with money injected into residential construction projects and new council houses.
Unsold and empty properties could also be turned into social housing, and around £300 million could be set aside to ensure existing and new council homes are better insulated.
Darling is also believed to be planning to extent the stamp duty ‘holiday’ on homes costing up to £175,000 by three months until the end of the year.
Michael O’Flynn, spokesman for FindaProperty.com, says: “November’s pre-Budget report introduced a temporary increase in the starting threshold at which stamp duty is charged, which had a positive impact for some buyers.”
With restricted mortgage lending still preventing many people from getting on the property ladder, the government is expected to announce plans to underwrite £50 billion of guarantees of new mortgage-backed assets to kick-start the housing market. This would reduce funding pressures on banks’ balances sheets and free up more cash for lending.
The pressure is on the government to announce firm measures to help people who have lost their jobs as a result of the recession and to support companies from making further redundancies.
Prime Minister Gordon Brown has already pledged it will be a "Budget for jobs" with unemployment figures expected to peak at 3.25 million next year. Darling is expected to outline a £2 billion package, which will expand the services provided by Jobcentre Plus and launch new schemes to train unemployed young people.
Those under the age of 25 who have been jobless for more than a year will be guaranteed a job, work experience or training.
Page predicts Darling will direct a sum of money into measures for training and helping the unemployed get back to work. He could also create thousands of ‘green jobs’.
Savers and pensioners
The historically-low Bank of England base rate, while designed to help consumers, has hit savers hard with many people seeing the income from their nest-eggs all but dry up. To revive confidence in saving, the government is likely to increase the ISA allowance.
Gordon Brown hinted at such a move in March while answering listeners’ questions on Radio Four: “We are looking at how ISAs could be made more attractive for the future. And we’re trying to make sure that in era of low inflation that the incentive to save remain high [...] In the Budget you’ll see some announcements.”
Graham Beale, chief executive at Nationwide, has called for the annual ISA allowance to increase from £7,200 to £8,735 to counter the effect of inflation.
It is also hoped that the government could scrap taxation on the interest earned on ordinary savings accounts – a move supported by the Conservative Party. However, the Treasury has already indicated it is unreceptive to such a move.
The UK’s 3.6 million higher-rate taxpayers look set to be the losers of this year’s Budget. As well as potentially generating additional revenue by increasing the rate of income tax for higher-rate taxpayers in 2009, Darling may also scrap tax relief on pension contributions – saving itself up to £2.3 billion a year.
Tom McPhail, head of pensions research at Hargreaves Landsown, says: “If the government chooses to go down this road it will leave a legacy as the administration that demolished incentives for people to save for their own retirement.”
The pre-Budget report contained several changes to tax, including reduced personal allowances for people earning over £100,000 from 2011, a proposed 45% higher income tax rate for people earning £150,000 plus and a 0.5% hike in national insurance contributions from April 2011.
The jury is out on any further changes, with experts divided over whether Darling will introduce big changes to taxation or leave things as they are.
Richard Mannion, national tax director at Smith & Williamson, believes income tax will be a focus in the Budget: “Alistair Darling is treading a very fine tax tightrope. He is under pressure to announce tax measures that support British business and hard-pressed families, but cannot afford to further remortgage our children’s future. Ultimately, certain groups of taxpayers are going to have to dig very deep - and probably for a long time.”
Mannion’s money is on Darling focusing on higher-rate taxpayers – despite this group already seeing their national insurance contributions increase on 6 April.
Elsewhere, there is speculation that the temporary reduction in VAT (from 17.5% to 15%) will be extended beyond 31 December 2009.
Industries such as those involved in renewable energy are believed to be in for a £500 million "green stimulus". This would include a multi-million pound investment in building wind farms off the UK's coastline with Darling also expected to promise billions of pounds in loans from the European Investment Bank to support energy projects.
According to the Campaign for Better Transport, transport is one area touted for fiscal stimulus. As well as potentially introducing green stimulus in this area, Darling could announce new transport taxation alongside lower rail fares to make low carbon transport cheaper.
A new £2,000 incentives for car owners to trade in their old vehicles for new ones – known as a "scrappage" scheme – could boost demand for new cars and help struggling carmakers who are suffering during the recession.
Bozena Jankowska, manager of the Allianz RCM Global EcoTrends Fund, believes the Budget will focus on environmentally friendly measures: “Following Obama’s lead, Gordon Brown has announced that the forthcoming Budget will contain environmentally friendly measures to aid a ‘green recovery’ from the recession and lead to the creation of thousands of ‘green collar’ jobs.”
However, with the government’s purse strings tied, a question mark remains over how green and how effective such an approach will be.
Jankowska believes Darling could unveil an electric car pilot scheme, further support for carbon capture technology, and the ‘greening’ of infrastructure with more money set aside to develop alternative sources of power.
Vulnerable members of society
Age Concern and Help the Aged, which joined forces to create one charity on 1 April, has urged Darling to think of pensioners and workers aged over 50 in his Budget. The charity wants the government to do more to tackle rising unemployment among older workers such as incentives for employers and help for those struggling to find new work.
It also calls for emergency funding of at least £1 billion to tackle the social care “crisis” and for the roll-out of automatic payment of key income-related benefits to pensioners.
Meanwhile, in light of a new league table of child wellbeing in European countries, in which the UK comes in 24th place out of 29 countries, the Child Poverty Action Group calls for the Budget to help families.
"Government action like Sure Start, child tax credit and the children's plan will already be making a difference, but more is needed,” says Kate Green, chief executive of the charity. "We cannot afford a 'do nothing' Budget for children.”
Child Poverty Action Group says that, in order for the government to achieve its goal to halve child poverty by 2010, it must introduce at least £3 billion in benefits and tax credits.
Energy bills, which rose so significantly last year, could be one area targeted by Darling. Philip Cullum, deputy chief executive at Consumer Focus, says: "Expensive energy bills remain a huge problem for the poorest households and unless the government invests in solutions now, millions of customers will suffer real hardship and fuel poverty levels will continue to spiral.”
He calls for a more coherent approach to energy efficiency, VAT cuts for energy efficient products and an end to “unfair” energy prices on pre-payment meter tariffs.