The phoney budget

March 17, 2010

Thomas StoryThomas Story is tax director at BDO. He will participate in a Reuters Budget live blog at noon GMT on Wednesday, March 24, 2010. Please tune in and join the discussion.-

The March 2010 Budget, to be held next Wednesday, will inevitably be highly political as it is effectively the starting gun for the general election campaign. In this context, further significant fiscal measures to tackle the 178 billion pound government deficit will almost certainly be postponed.

Whatever the political colour (or colours) of the next Government, tough decisions will need to be taken in a second Budget within months of the general election. Individual taxpayers and businesses should steel themselves for a frustrating period of uncertainty as party politics overshadow the uncomfortable fiscal imperative to raise significant additional tax revenues as a contribution, alongside significant public spending cuts, to curb the unsustainable fiscal deficit.

In the wake of the credit quake we have seen a 42 billion pounds fall in tax collections. This leaves the Chancellor very little room for any tax cuts to curry favour with voters but, equally, he dare not raise taxes significantly in a Budget held only a few weeks before a general election. We can expect a ‘Phoney Budget’ on 24th March with any hard hitting, significant tax raising measures deferred until the second 2010 Budget.

So what might the March Budget have in store?

Tax rates and allowances have already been announced in the November 2009 Pre-Budget Report and these will almost certainly be confirmed in the Budget. The Chancellor might be tempted to augment the 50 percent income tax rate for high earners with a “super tax” of, say, 60 Pre-Budget Report on income over 1 million pounds, but this is an outside bet.

A cut in the headline rate of corporation tax is a possibility, to outflank the Conservatives, who have championed this measure. This would almost certainly have to be funded by a reduction in tax reliefs such as capital allowances. Other significant fiscal reform is unlikely, as the Chancellor will be fearful of frightening the horses so close to the General Election.

The real sting in the tail will come in a post-Election June/July 2010 Budget when the Chancellor, no matter which party he represents, will face some stark choices.

There will undoubtedly be tax rises, whatever the outcome of the election. The focus will be on the taxes that hit us where it hurts; Income Tax, National Insurance and VAT as only these taxes have the potential to raise large enough amounts to put a significant dent in the 178 billion pound deficit.

I expect that VAT will rise to at least 20 percent regardless of the colour of the government.

In conclusion, I fear that the March 2010 Budget is bound to be more about ‘Punch ‘n’ Judy’ politics rather than important fiscal reforms. Sadly, it is almost unavoidable that taxes will rise after the election, in addition to cuts in government spending, irrespective of the outcome. I am convinced that some tax rises are much more damaging than others and this should be a key area of the electoral debate. However, it is almost inevitable that we will need to wait until a second Budget to find out exactly where the tax hikes will occur.

Comments

I think VAT should go down instead of up. Young people are leaving the country to work elsewhere because of the high cost of living. Taxes tied to land would be more sensible as young people can vote with their feet but land simply cannot walk to another country. This has to be a young people friendly place before the economy has any chance of coming back.

Posted by Lee Siu Hoi | Report as abusive
 

Whatever party gets in there should be a huge simplification of taxes. Labour have instituted a large number of “stealth” taxes which should be blown away. All these myriad taxes must cost billions to administer and collect. Why not just have Income Tax, Corporation Tax and VAT? Easy and cheap to collect , easy for Joe Public to understand. The savings in admin would be huge.

Posted by Barks | Report as abusive
 

I have already told my daughter to get her engineering degree & LEAVE the UK. Where – to be decided nearer the time.

We are degenerating into a 3rd world basket case; I do not expect a full recovery in my lifetime. It took 30 + years to pay of the US after WW2 & will likely take a similar time to clear up this current disaster.

The UK is essentially stuffed for at least a generation.

Posted by William Fletcher | Report as abusive
 

“”The UK is essentially stuffed for at least a generation”"

Forever more like it. It started when you decided to be a welfare state – fair enough you wanted to protect the people, but you forgot that you also have to protect the revenue streams required to pay for it.

Now you bring in half the third world to replace your best and brightest who left for the colonies long ago.

You have lost your car manufacturing – you can’t even make a black cab, your aircraft industry, your ship building, your steel making all gone.

Do you actually produce anything anymore apart from socialists?

Posted by brenton | Report as abusive
 

Not any Phonier than any other Budget as all Budgets are Phoney

Posted by GROW UP | Report as abusive
 

I remember when Gordon Brown lectured Europe on the (then) successful Anglo Saxon model for an economy. The German finance minister commented that’ Britain is conducting an economic experiment based on everyone cutting each others hair. We will continue to make things’ Who was right?!!!!

Posted by p savage | Report as abusive
 

Another sitting on a moral high ground lecturing other people run the risk of embarrassing himself/herself. As far as economy is concerned, we are all like three blind men touching an elephant — everyone has a bit of the truth but not the whole truth. I always think a limb duck government is the best government.

Posted by Lee Siu Hoi | Report as abusive
 

Anyone sitting on a moral high ground lecturing other people run the risk of embarrassing himself/herself. As far as economy is concerned, we are all like three blind men touching an elephant — everyone has a bit of the truth but not the whole truth. I always think a limb duck government is the best government.

Posted by Lee Siu Hoi | Report as abusive
 
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