Pre-budget report: Who wins and who will pay for it?

November 24, 2008

Mark Schofield is a  tax partner at PricewaterhouseCoopers LLP. The views expressed are his own.

mark-schofieldThere were a number of initiatives unveiled to kick start the UK economy which will increase the budget deficit for 2009/2010 to £118 billion. The Chancellor assured the House of Commons that finances would be back in balance by 2013/14 at which point the country “will only be borrowing to fund investment”. By that year the net UK government debt will be over £1 trillion representing 57.4% of GDP, compared with an estimate of £602 billion, 39.4%, for 2008/9.

Who wins with fiscal stimulus and who will pay for it? In short, everyone wins with the temporary reduction in the VAT rate to 15%, the deferral of previously announced tax rises, making permanent the compensation for the abolition of the 10p tax rate and extra help for families with children, and pensioners. There was help for business too with the ability for small and medium sized businesses to spread tax payments where they have difficulty making them. The reform of the taxation of foreign profits including the introduction of an exemption from UK taxation of foreign dividends took a significant step forward. The details of these reforms will be published next week and are eagerly awaited to see whether the overall package addresses the concerns raised previously raised.

There is a cost to all this, primarily from the reduction in the VAT rate. That will be financed by extra efficiencies in public spending, increases in National Insurance Contributions for both employers and employees, the restriction of personal allowances for those earning over £100,000 a year, and a new top rate of tax of 45% for incomes over £150,000 a year, the rises all to take effect from 2011.

Overall, a complex package with a number of initiatives intended to stimulate fiscally but also to bring the books back into balance on a year by year basis at a later date. Given the current uncertainties, time will tell whether it achieves the desired effect.

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