Budget Day 2009 - 22nd April

You've been to a big party and over-indulged.  You wake up to realise you'd drunk a lot more than you thought and your head is thumping....do you

a) take your medicine and sober up; or

b) head back to the drinks cabinet and accept a double hangover the next day?

Mr Darling appears, to my mind, to have opted for "plan B".  Unlike the Irish who are already in the economic "straight jacket" of the Euro, we're going to keep spending and hoping for an early recovery.  The Irish, finding no appetite for their bonds have accepted the party is over - they can't print their own money so they've dug out the asprin, cut pensions, cut public projects and are raising taxes - in short, pain now for gain later.  However, our Government appears to have no such strategy.  And maybe they are right.  I find myself cynical but optimistic once again.

A sensible summary of the Budget will appear on the right hand side of our website by mid-morning on Thursday (or sooner I hope).  However, this blog should cover some key points and gives my very personal view on the terrible mess the public finances are in.

Before you all click back to work with boredom and say "Donald's at it again" let me highlight why the current position is unforgivable (whatever colour your politics!) as it will be all of us that have to pay for the new reality of "Bankrupt Britain".  In March 2007 the Sunday Telegraph point out that despite average 2.8% growth between 1997 and 2007, the IMF had noted that the UK was disappointing with "a sharp deterioration in the fiscal balance and rising public debt".  By August 2007 we were already in the "sub-prime crisis" and Liam Halligan wrote in the Telegraph that the UK was badly placed to weather any financial melt-down if the sub-prime crisis widened since the UK had the third largest balance of trade deficit in the world.  Around this time, the IMF reported that the UK was "uniquely badly placed to weather a recession".

In short, the taxpayer has been cheated by the experts and politicians in arriving at today's appalling figures. 

In October 2007, Roger Bootle, a credibile economist, commented that the forecast growth shown in the PBR of that year was far too high with 2.5% growth approx shown going forward.  In PBR 2007 we had a forecast of a deficit of £4 Billion for this year (09).  The actual figure is £175 Billion (so far, and counting).  Despite the "unforseen" it is not forgivable that caution has been thrown to the wind since mid-2007 and no effort made to steady the ship.  In late November 2007, Andrew Smith, chief economist with KPMG, was quoted in the papers saying "the Chancellor is crossing his fingers and trusting to luck" with regard to that PBR speech.

Jumping forward a year, in November 2008, the PBR forecasts and the "spend now, tax later" strategy were said in the Financial Times to be "quite a gamble".  I know this because I keep the newspapers from the day after past Budgets...

So, it has been fairly obvious since mid-2007 that there was a strong possibility of a major recession.  Many economists were prediciting this by the end of 2007 as the "credit-crunch" hit home.  Certainly, by the time Northern Rock collapsed it was obvious to everybody (except the Treasury) that things were not "normal"!

So, why are we in our current difficulties?  Well, it's probably a combination of matters including bad advice from over-optimistic advisers and an absolute refusal to consider any material reduction in public expenditure or increase in taxes. 

So, what about the Budget - is it a success?  I have only one view on this - it is a success if it reassures the markets and allows Mr Darling to continue to raise money via debt in the Bond markets.  If the rating agencies were to downgrade Sterling or a bond auction or two fails it seems to be accepted we will be in the most serious and immediate difficulty.  Let's hope that my own faith in the UK is shared by those who have surpluses to lend to us.  Despite the appalling figures there is nothing that growth, taxes and a new Government committed to a "leaner machinery of state" can't achieve.  If the markets react badly and there is another round of "quantatitve easing" - where we create new money to lend to the Government as debt - then who really knows where we are headed.  As Mr Cameron's response in the House alluded, some Labour ministers are already talking about the fact that IMF involvement might not be "all bad".  Such talk is, of itself, surely dangerous territory.

In terms of the Budget, the usual rules apply -

1. Important Budget's rarely have the most exciting changes

2. The devil is in the detail, and not in the speech.

As a precursor to reading the "sensible" commentary some key points include a new 50% top rate of tax for the highest income earners from April next year.  This will kick in at £150,000 pa of income.  However, at £100,000 you lose your personal allowances.  And, worse still, pension contributions will not be allowed 50% tax relief.  I'm still to read the details but it's worth remembering that there is national insurance to consider- uncapped at 1%, rising to 1.5% too.  This means the "top rate" is really 51.5% - so we are back to a psychologically important tipping point where if you have high income the Government gets more of it than you do - this is not a good thing surely?

I'm with Dennis Healey who says punitive rates of tax never raise the amounts you expect.  High earners invariably find ways of avoiding them.

Indeed with capital gains tax at 18% (and sometimes 10%) it does seem to me, as a tax adviser, that many clients will be working very hard indeed to ensure their investment strategy is "all capital".  No doubt a future Government will see through this ruse and either introduce complicated avoidance rules or change the capital gains tax rate to something higher.

Most of the other changes are mundane for 99% of taxpayers I'm afraid.  Booze and fags are "up", with fuel duty prices to be put back on to an escalator (Sept rise then annually).

Sure, there's some small changes to reintroduce a first year allowance for capital expenditure of businesses (40%) - I think he removes and reintroduces than every few years to make a headline - and some marginally improved rules for loss relief of companies (carry back 50k for 3 years) but I really am NOT very excited.

No doubt I'll read the releases tonight and it'll dawn on me that there really is a "big bomb" hidden in there...but, at the moment, the bad news is that we really have swapped a banking finance crisis for a public sector finance crisis.

My insolvency partner has just asked if he should apply to liquidate UK PLC....

Please do keep an eye on our website -  as the sensible update etc. will appear over there to the right hand side by 23/04 sometime....

*** AS EVER THIS IS THE PRIVATE COMMENTS OF DONALD PARBROOK, CHARTERED TAX ADVISER.  HIS VIEWS MAY NOT BE THOSE OF THE FIRM, MILNE CRAIG, OR ANY OF THE PARTNERS OR DIRECTORS RESPECTIVELY ***