Monday, 24 November 2008

Pre Budget Report. A Summary

This afternoon saw the Chancellor, Alistair Darling, present his pre budget report to the nation, including one or two announcements we all expected.

So how does this affect most of us, and what are the first reactions to this PBR. In this post, we will take a quick look at the highs and lows of the budget, and quantify the impact on our pockets.

Initial Reaction

The financial markets have rallied slightly, even this soon after the announcements.

There are, however, concerns that this is a short term impact, whilst many analyse the long term implications. Much of the market has focused on the current instability of the economy, rather than it's long term sustainability, and, once these long term implications begin to sink in, the initial optimism may be dented somewhat.

This is, by far, the most 'socialist' budget from the current Labour Government, and is also a far more risky one, representing a major shift for the ever cautious Mr Brown and his government.

The main concerns are the, apparently, optimistic projections, from Mr Darling in respect of both future economic growth, and potential cost savings.

The Highs
  • VAT is to be reduced from 17.5% to 15 with effect from 1 December 2008. This will last for 13 months, until 31 December 2009, when it will revert back to its current rate.
  • The temporary £120 allowance for those who lost out when the 10% banding was scrapped is to be made permanent, with the amount rising to £145.

  • Pension credits will increase from £124 to £130 per week for single people.

  • The state pension will also increase, from £90.70 to £95.25, and every pensioner will receive a lump sum payment of £60. (£120 for couples).

  • The increase in child benefit will be moved forward, from April to January.

  • There will be a temporary increase in tax relief thresholds for empty properties. Also, some firms struggling to pay these, will be able to spread the timetable for payment.

  • £1bn has been promised for a temporary Small Business Finance Scheme.

  • An extra £100bn is being provided to help households improve insulation.

  • £15m is promised to offer debt advice.

  • Repossesion should be the last resort for mortgage lenders, with a 3 month grace period for those struggling to make payments.

  • The Government is seeking to find a further £5bn in effieciency savings in 2010/11

  • £3bn of capital spending will be brought forward from 2010/11, to include housing and road projects.

  • Taxpayers with genuine financial reasons, will now be able to spread payments of both tax and VAT over whatever period they can genuinely afford.

  • A proposed 1% increase in the Small Companies rate of Corporation Tax has been postphoned.

The Lows

  • The single most unpopular announcement in this PBR was the increase of 0.5% in all rates of national insurance, from April 2011. On the plus side, the starting point is to be raised to the level of income tax.

  • Again, from April 2011, a new 45% income tax rate will be charged to all those earning in excess of £150,000 per annum.

  • Alcohol, tobacco and petrol taxes will all be raised to offset the VAT cut.

  • Although deferred, and reduced on original plan, new vehicle excise duties will soon be introduced.


There is no doubt there are some positive aspects to this budget, but there are some serious doubts as to

(a) The credibility of the projections, and;

(b) The actual impact of these changes.

In order to fund the VAT cuts, The Chancellor is projecting borrowings next year of £78bn, rising to £118bn in the subsequent year. (Earlier in the year, he was projecting a peak borrowing of £38bn). This is also being funded, in the main, by the increases in national insurance contributions. There are concerns that Mr Darling's growth projections are unduly optimistic, which may then impact on the government's ability to repay these unprecedented levels of debt.

In the real world, how will these changes affect the majority of us? The VAT reduction has, in the main, been greeted very favourably, but, will it make that much of a difference?

There are concerns that a 2.5% reduction will not have a significant impact on spending, especially when many high street retailers are already having 'sales' of 20, 30 or more percent already. A much bigger impact (though not a positive one) is the practical issues, such as the cost and inconvenience of changing paperwork, product prices, web sites, signs, etc etc. This is particular annoying when we know it is only for 13 months, when we shall have to go through the whole process again.

There is also the concern arising for those of us on the flat rate scheme. (See our earlier post of today).

A brave PBR, but also a risky one. Time will tell if the gamble will pay off.

Anyone concerned as to the implications of the new VAT changes can check out the HMRC Guidance notes, at the following link.