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A political not economic budget


Yesterday’s budget was the last of this Parliament, coming 6 weeks before the anticipated General Election date of May 6 2010. It was always going to be an overtly political budget with detailed announcements on spending cuts delayed until after May. The markets have reacted calmly – principally as most analysts believe this will not be the last budget of 2010, with a post-election emergency budget detailing the fiscal and public spending priorities for the next spending round.

It is clear that whichever party forms the next Government public spending will face significant downward pressure along with an increase in taxation. Despite the public dividing lines between Labour and the Conservatives, the actual structural difference in approach is likely to be marginal: Labour has publically committed to using a combination of two thirds spending reductions with one third tax increases to address the budget deficit, whilst the Conservatives are widely believed to favour an 80/20 split. The Chancellor has committed the Government to reducing the deficit by half in 4 years, whereas the Conservatives have stated they will reduce the deficit without committing themselves to a timescale.

Media Reaction

Reaction to the budget in this morning’s media is broadly along party lines. For the FT, the Chancellor “ducked the deficit challenge” by delivering a “highly political budget”. However the paper saw the speech as broadly neutral and one that reassured the markets.

The Guardian is more positive in its budget analysis, carrying the headline ‘Keep calm and carry on’. The lead article details how the Chancellor resisted the temptation of a pre-election giveaway in favour of putting his “personal stamp on a package designed to cement recovery”. For Polly Toynbee, yesterday was Alistair Darling’s “day of vindication”. The Mirror is equally enthusiastic, describing the Chancellor as a “budget winner”, and detail how the budget was focused on the rich in order to “help the poor”. The Independent agrees, believing the Chancellor’s strategy for power was to “divide and rule”. The Times echo these sentiments, describing it as “nakedly political” which “combined a raid on the rich with the theft of Conservative ideas”.

However, the Sun believes the Chancellor has “shafted millions of ordinary Brits” detailing rises to cigarettes, alcohol and fuel. The paper accuses Mr. Darling of “deficit attention disorder” for failing to tackle the national debt. The Express believe it was a budget of “envy and spite” and that the Chancellor had taken “revenge on Britain’s hard workers”.

The Mail decries what it believes was the introduction of a ‘stealth tax’ on the middle-classes. The paper claims that up to 15 million workers will suffer a £15 billion-a-year tax raid in measures that the Chancellor “barely mentioned”. The paper points to a rise in National Insurance from 2011; the freezing of personal allowances; the 50 percent top rate for those earning £150,000 or more and a cut in pension tax relief as all contributing to the £15 billion figure. The Telegraph is equally unimpressed, describing the Chancellor as undertaking a ‘tax raid on the middle class’.

Key Points

  • The economy contracted by 6% over the course of the recession. Growth is predicted this year of 1-1.25%, and in 2011 3-3.5%. Many commentators believe the 2011 growth forecast is too optimistic.
  • Borrowing is forecast to be £167bn this year, which is £11bn lower than predicted in the Pre-Budget Report.
  • Public sector net debt is forecast to reach 54% of GDP this year, rising to 75% in 2014/15.
  • The Chancellor forecast that the deficit will fall from 11.8 per cent of GDP to 5.2 per cent – more than halved over a four-year period. Property & Business
  • The Government is to create Strategic Property Vehicles to run public sector property by 2011, a move expected to save £1.5bn in running costs.
  • £2bn of public sector property assets to be sold off by 2013/14.
  • Real estate investment trusts (Reits) will be permitted to count stock dividends towards their 90 per cent income distribution requirements.
  • Nationalised banks to provide £94bn in credit to businesses
  • Credit adjudications service to be established to review lending decisions to business with power to compel banks to lend
  • Business rates to be cut for a year from October.
  • Annual investment allowance rises to £100,000, which is aimed at helping SMEs.
  • Entrepreneurs relief from capital gains tax (CGT) doubled to £2m. No increase in main rate of CGT.
  • New green investment bank with £2bn of assets confirmed.
  • The penalty for tax avoidance to rise to 200% of the amount of tax owed.
  • New tax information agreement announced with Lichtenstein. Belize, Dominica and Grenada to follow imminently.

Infrastructure

  • Tax Infrastructure Financing programmes extended with £120m to be made available for the introduction of an Accelerated Development Zone (ADZ) pilot programme in 2011-12.
  • A small number of local authorities will receive capital grant funding for project that will unlock growth and deliver strategic infrastructure in a move designed to test the case for Tax Increment Financing.
  • £100m to pay for improvements to local roads damaged by the extreme weather at the end of 2009/ beginning 2010, alongside £280m for trunk road improvements.

Tax & Duty

  • Stamp duty for first time buyers will double to £250,000, which is to be paid for with a rise in duty for homes over £1,000,000 to 5%.
  • Inheritance tax threshold will be frozen for the next 4 years
  • Planned increase in fuel duty to be phased over one year rather than immediate change.
  • Tobacco duty will rise to 1% above inflation.
  • Duty on cider will be increased by 10% above inflation, which brings the beverage into line with others.
  • Duty on beer and wine will go up by 2%

Dan Innes, Managing Director

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