Not now, Darling? Chancellor ducks main issue
Not now, Darling?
In the wake of severe recession and the credit crisis, and ahead of next year’s General Election, 2009’s Pre-Budget Report was widely expected to be somewhat controversial. However, as it turned out, the Pre-Budget Report managed at the same time to be both controversial and anticlimactic. Chancellor of the Exchequer Alistair Darling announced measures of varying popularity, but largely failed to address the most pressing problem of the UK’s soaring debt.
The recession has led to a decline in revenue from taxes and a rise in State support for households and businesses, which has forced the Government to increase borrowing although it is still not clear how it intends to tackle the UK’s highest budget deficit since the Second World War. Borrowing for 2009 is now forecast to reach £178bn, an increase of £3bn. During 2010 and 2011, borrowing is expected to hit £176bn and £140bn respectively, declining to £96bn by 2013. The Government expects the UK’s budget deficit to reach £611bn by March 2013 – considerably higher than its previous estimate of £606bn.
Darling intends to find two-thirds of the money needed to reduce the deficit through cuts in public spending, with tax increases making up the balance. Meanwhile, higher economic growth in 2011 and 2012 should help reduce the deficit. The Chancellor forecast a £31bn rise in total spending during 2010/11, but did not provide a spending review beyond this date. The Confederation of British Industry (CBI) criticised the lack of clarity, complaining it is “no clearer today as to how the Government plans to reduce public expenditure”.
More severe
he Chancellor admitted the recession had been more severe than he had anticipated. The Treasury now expects the UK economy to have contracted by 4.75% during 2009, compared with its earlier forecast of between -3.25% and -3.75%. However, Darling stated his belief the UK economy is recovering, and will return to growth by the end of 2010, but he warned against complacency. Looking further ahead, the Treasury has forecast economic growth of 1% to 1.5% during 2010 and of 3.5% in 2011 and 2012.
Bank bonuses grabbed the headlines following the release of the Pre-Budget Report with news of a one-off tax of 50% payable on discretionary bonuses of more than £25,000 within the financial sector. This will be paid by all banks with UK operations. Some business groups dismissed the measure as a “populist” move, viewing it as an attempt to appease disaffected voters in the wake of a credit crisis that saw UK taxpayers bail out troubled banks to the tune of more than £1 trillion during a recession.
A tax on jobs?
In another controversial move, the Chancellor raised National Insurance contributions from 2011 for all workers earning an annual salary of more than £20,000, leading the opposing Conservative Party and some business groups to attack this measure as a “tax on jobs”. The CBI described the move as a “serious mistake”, while the Institute of Directors warned that the rise in National Insurance contributions would “put jobs at risk and make it even more difficult for businesses to rehire once the recovery starts”.
Elsewhere, tax allowances and thresholds for individuals are to be frozen at 2009/10 levels, a move that will increase income tax bills for many people. Public sector workers will have their pay increases capped at 1% for two years from 2011, a measure that will mean lower pay in real terms. The Chancellor also confirmed VAT would return to its previous level of 17.5% from January 2010.
The state pension is set to rise by 2.5% from April 2010, while child and disability benefit will increase by 1.5%. Duty on bingo was cut from 22% to 20%. The Chancellor announced plans to provide guaranteed work or training for young people who have been out of work for six months or more. He also outlined a “green” package of environmental measures, including a boiler scrappage scheme and investment in low-carbon and renewable projects.
Deferring the toughest decisions
2009’s Pre-Budget Report is probably best characterised by its lack of ambitious plans to support the UK economy and public finances. Britons might have preferred a short, sharp pain followed by swift recovery to this slow, more uncertain process. However, the toughest decisions appear to have been deferred until after the General Election and, looking ahead, the onus to get tough is likely to fall on the next occupant of Number 11, Downing Street. No matter who wins next year’s General Election, higher taxes and substantial spending cuts appear inevitable.