Fishburn Hedges

09.12.2009

The Pre-Budget Report presented Labour with one of its last opportunities to frame the economic debate ahead of the general election campaign. In a widely predicted move, Chancellor Alistair Darling avoided announcing any widespread cuts, arguing that this would hamper recovery. Instead he focused on securing investment and growth and raising revenue from the wealthy, claiming that the majority of continued public investment would be funded by the top 2% of income earners.
 
In line with this, the Chancellor unveiled a 50% levy on banker bonuses over £25,000, but ruled out the introduction of a windfall tax on banks. In a surprise move, national insurance will rise by 0.5% from April 2011 for anyone earning more than £20,000. In response, the Conservatives have said that of all of Labour’s tax rises this will be the one they look to avoid as it impacts the many, not the few. Elsewhere, the Chancellor announced the freezing of the inheritance tax threshold for 2010 – effectively forcing the Conservatives to justify their proposals that extend to the wealthy – whilst also putting off a 1p rise in corporation tax for small businesses.
 
Alongside the PBR statement, the Treasury published a Fiscal Responsibility Bill to halve the deficit (£178bn) in four years. Darling stressed that the deficit reduction plan will be done ‘in an orderly way’ and be underpinned by the Labour values of fairness and opportunity ensuring that frontline services such as hospitals, schools and policing are protected. This came, however, as the Chancellor imposed a 1% cap on pay rises for public sector employees inflaming the unions and leading TUC General Secretary, Brendan Barber to state that “public sector workers, many of whom are low-paid, should not have to pay the price for a crash they did nothing to cause”. 
 
Reaction from the Conservatives and Liberal Democrats is that the Chancellor effectively delivered an electioneering budget. The Conservatives dismissed it as a “Pre-Election” rather than “Pre-Budget” report that shied away from making the tough decisions on cuts, while Liberal Democrat Shadow Chancellor, Vince Cable said “what we needed was a national economic plan and what we have got is an election manifesto”. The Conservatives, and Shadow Business Secretary Ken Clarke in particular, were quick as well to attack the Government’s decision to postpone a spending review accusing them of trying to ‘shut down’ debate on public spending. Pundits and commentators alike have also criticised the budget as not bold enough for the markets or credit rating agencies to be satisfied, and that the continued spending is unrealistic and untenable.
 
While for many yesterday’s Pre-Budget report will have raised more questions than answers, what is clear is that the economic and political dividing lines have now been well and truly drawn as we head towards the general election. The Government will be hoping that the Pre-Budget report demonstrated that they are the party of growth, with the Conservatives positioned as placing recovery at risk. With David Cameron receiving a sustained boost in the polls after last year’s Pre-Budget report, the Chancellor will be waiting anxiously for signs in early 2010 that economic recovery is on the horizon.
 

Key points

 

The economy

 
- Darling reiterated that he expects the economy to start growing by the turn of the year
- Although unemployment is lower than expected, Darling said it will continue to rise for the next few months
- Darling was forced to revise down his estimate from Budget 2009 that the economy would contract by 3.5% this year. In fact, the economy contracted by 4.75% in 2009
- He predicted growth will be 1-1.5% in 2010 and 3.5% in 2011
- HMT has revised down the estimation of provisional taxpayer losses from the bank bailout from £50bn to £10bn
- Net borrowing will rise to £178bn in 2010, falling marginally to £176bn in 2011, reaching £96bn in 2013/14
- Borrowing is projected to fall from 12.6% of GDP this year to 4.4% of GDP in 2014/15
- Net debt in relation to GDP will peak at 78% in 2014/15

Tax

- Darling said that tax measures would be guided by the values of fairness and responsibility “the biggest burden will fall on those with the broadest shoulders”
- A one off 50% levy will be charged on banker bonuses over £25,000, yielding £500m. However, the - Treasury decided against a windfall tax on banks
- Employer pension contributions will be included in higher-rate tax relief restrictions
- No immediate change to income tax thresholds but in April 2012 the Government will freeze the point at which people start paying income tax at 40%
- The inheritance tax threshold will be frozen at £325k for 2010
- National Insurance rates will be increased by 0.5% from April 2011, raising £3bn a year. Those earning under £20k will be exempt from the change
- VAT will return to 17.5% on 1st January 2010
- Basic state pension to rise by 2.5% from April 2010
- A new 50p duty on landline phones will be included in the Finance Bill to contribute to costs of high speed broadband
- Darling said the Government will defer the 1p rise corporation tax for small businesses
- The Government will encourage R&D in pharmaceuticals and biotechnology by introducing a new 10 per cent corporation tax rate on income which stems from patents in the UK
- Stamp Duty holiday to end on 1st January 2010

Spending

- The Government will stick to its public spending plans for next year. There will be a growth in spending of 2.2% in 2010/11. Spending will then decrease by 0.8% from 2011/12 to 2013/14
- Health, schools and the police will be protected from spending cuts, with these areas receiving real term increases in spending for the next two years
- £12bn a year will be saved by abolishing quangos, selling public assets, streamlining back office functions and cutting Government expenditure on marketing and communications
- £5bn savings will be made by phasing-in the roll-out of pension personal accounts and cutting back on the scope of major IT projects as well as refocusing regeneration spending
- Public sector pensions will be capped from 2012 saving £1bn a year
- For the two years from 2011, the Government will ensure that all public sector pay settlements are capped at 1%
- The senior civil service will also cut its pay bill by up to £100m over the next three years
- Overseas aid budget to rise to 0.7% of GDP by 2013

Other measures

- School Leavers Guarantee extended for one year
- Enterprise Finance Guarantee Scheme extended for one year
- An extra 75,000 households will benefit from an extension of the Warm Front scheme
- Energy companies will be required to provide up to £300m discounts on energy bills to a further 1m low-income households
- The Government will help 125,000 homes replace the most inefficient boilers with new models
- Households who install home wind turbines will receive £900 tax-free to help them connect to the National Grid
- The rail electrification programmes for the Great Western Main Line and the North West will go ahead and Darling has also given the go ahead to further plans for rail electrification between Liverpool, Manchester and Preston