Pre-Budget Report 2008  - notification at 17/11/08

Just in case you’ve missed it in the media, the Chancellor will deliver his next Pre-Budget Report next Monday 24^th November.

In the aftermath I will write some comments up and within a day or two we will post a “glossy” guide on our website to download.  We will not be sending printed booklets out on this occasion .

It is widely expected that the Government will launch a “fiscal stimulus”….or, in plain English, Mr Darling is likely to try to cut taxes, increase spending and borrow more.  As such, this PBR might be one to watch with interest.

I have often said I’d like to find time to take the forecasts from each PBR and Budget and “benchmark” the growth and borrowing forecasts to actual.  It is my personal observation that we have had repeated Budget statements which set out to fund public spending increases through long term growth whilst borrowing continued “in the short term”….lots of talk about a Golden Rule.  The only Golden Rule I can see is that the public should think things are just great and vote Mr Brown back in.  Of course, it’s easy with hindsight to realise that it was naïve to keep borrowing and forecasting growth as there is a natural economic cycle in the economy.  However, the man who seems to be the new "Global Financial Hero" didn't see the trouble ahead....

In March 2007, Gordon Brown’s last Budget, the Chancellor said

“We will never return to the old boom and bust.....looking ahead to 2008 and 2009, inflation will be on target……in 2008….our growth will be the highest in the G7 – between 2.5% and 3%.....our fiscal discipline is the foundation of the strength of Britain’s finances”.

He then went on to forecast £35bn of borrowing this year – and it’s likely to top £100bn in reality.  Well, you can’t be right all the time!  He may well be a serious man for serious times but he was also seriously wrong in 2007.

You might ask why a partner in an accountancy firm is using his Blog to make a seemingly very political point. 

Well, frankly, the point I am making is that it appears that we need tax rises – maybe not this time around, but certainly in future if we are to keep public spending levels high and make any headway into getting our public finances back in shape.  It seems that the banks and the Government – the two main stewards of our wealth – all got carried away on the crest of a wave.  They both adopted strategies which were not going to lend themselves to supporting a recessionary phase in the economy.  So far the banking sector has started to pay the price, it will be interesting to see how hard the rest of us are punished for what I would say has been “spending like there’s no tomorrow” (or at least on the assumption tomorrow would be a better day than today). 

Turning to the options for Mr Darling there’s been a lot of speculation about what he can do.  I’ve noticed in recent years that some of the announcements are consistent with the speculation and have always wondered if the politicians allow some leaking of ideas to test them via the media before the Budget or PBR.  Perhaps I am getting too cynical.

So let me say what I think he should do with the full expectation NONE of these wishes will come true -

1. Increase vat to 20% - yes, at odds with the speculation but this would raise much needed income without affecting the price of essential commodities such as food.
2. Cut corporation tax to 15% for small companies and 20% for large companies.  This measure would encourage large businesses to remain in the UK rather than migrate to Eire.
3. Allow trading losses of a company to be used more flexibly e.g. carry back to three years.
4. Further enhanced rules for tax allowances on capital expenditure to encourage firms to spend more money in 2009.
5. Re-introduce mortgage interest tax relief for up to £250,000 – i.e. build tax relief back into main residence mortgage costs.
6. If he does see fit to decrease taxes then I would plead with him to keep it simple and to simply increase the personal allowances with, if necessary, a reduction in the point you reach 40% tax to match as far as they can. 
7. Replace the "Tax Credits" system - it's widely discredited and whilst it provides benefit to many there really should be a system that operates without several Billion per annum in overpayments.

In any case, there'll be more on the PBR next week.  I do wonder if he'll adopt the liberal idea of removing the higher rate slice of tax relief for pensions to pay for some of the tax cuts he hopes to achieve?  It would be an "easy kill" and wouldn't cost too many votes.  Then again, he might want to leave pensions alone to avoid any of us focusing on the fact that our Council Tax bills are about to be increased to cover the deficit in the tasty final salary pension schemes in the public sector whilst our own "defined contribution" schemes languish in uncertainty following the stock market collapse (to be fair the 1997 removal of the dividend tax credit has caused much of the pain in the private sector).

Apologies if this was a somewhat political rant but I really have trouble warming to the idea that the "new financial reality" is all "global" and that the depth of the problem is entirely disconnected with a decade of financial mismanagement.

***Please remember that this blog is a personal article by our tax partner, Donald Parbrook and his opinions may not be those of other partners or the firm.***