Pre Budget Report 2009. A Quick Summary

Yesterday saw Mr Darling’s second Pre Budget Report since taking office last year. So, how does it compare with last years, and how will it affect us all?

Some of you may recall that my main concern last year, as it was for most commentators, was the optimistic nature of the Mr Darling’s projections, both in terms of future economic growth and potential cost savings.

In the 2008 Pre Budget Report, the Chancellor predicted 2009 borrowings of £78bn, rising to £118bn in 2010. (Earlier in 2008, he was predicting borrowings of £38bn).

So where are we now? Well, according to Mr Darling, the Government will spend £178bn more than it earns, this year alone, with overall borrowings rising by £789bn in the next 5 years.

The concern at the moment is that these projections are based on assumptions that the economy will start to grow rapidly, and that taxes will rise, after which, the level of debt should fall. Bearing in mind the Chancellor’s ongoing history of extreme optimism, it’s not the most encouraging of plans.

Ok, but why is this Pre Budget Report so important? Well, it’s the last throw of the dice (perhaps a rather unfortunate analogy) for Labour and it will lay down some of the policies that will be used to fight the general election next year. This is particularly important, as we plough our way through the longest recession on record, when employment is on the increase, and Labour are about as popular as a fart in a spacesuit.

The Government really needs to cut spending and increase taxes if they are to tackle our current debt crisis, but that will hardly boost their popularity in the run up to the election.

So that’s where we are, but what’s the plan, and how will it actually affect us?

The Highs

Bankers’ bonuses will, effectively, be taxed at 90%. (Yes, I know that’s not a high, if you’re a banker, but I can’t help feeling it will raise an approving smile from the majority of us) The bankers, themselves, already pay tax of 40% on these bonuses, and, now the banks, themselves, will also have to pay a further 50% of any bonuses in excess of £25,000. Sounds great, but it is only expected to raise around £500 million, a drop in the £178bn deficit ocean expected this year alone.

The 2008 Pre Budget Report announced plans to allow businesses to spread their tax payments in times of financial hardship. This has now been extended “for as long as it is needed” which should avoid too many businesses going bust as a result of a large, unexpected tax demand.

The ‘Access To Credit Scheme” has been extended. This is the scheme whereby the Government guarantees borrowing by businesses, thereby increasing the likelihood of the banks lending to them.

Empty property relief (where empty properties, with a rateable value below £18,000, are not subject to business rates, as long as they remain empty) has also been extended.

The Increase in small company taxation, originally scheduled to kick in from April next year, has been suspended for a second year in a row.

In order to allow more over 65s to claim Working Tax Credits, the hours needed to work, in order to qualify for them, have been reduced.

Currently, any 18-24 year old, who has been out of work for more than 12 months is guaranteed work or training. From next month, this has been reduced to 6 months.

State pension is to increase by 2.5% in April next year.

At the other end of the spectrum, child benefits are to increase, by 1.5%, from the same date.

Interestingly, Mr Darling has given a global guarantee that anyone in work will always be better off than they were on benefits.

One piece of good news for the elderly is the announcement of discounts on new boilers, which will, hopefully, help those who struggle with the rapidly increasing energy prices.

Free school meals were announced for 500,000 children from low income families.

The Lows

VAT will return to 17.5% from 1 January 2010. Not only will this reverse the, admittedly questionable, benefit of reducing the VAT level last year, but those businesses who spent the time and money changing price lists etc must now repeat the process, once again.

As with VAT, the stamp duty threshold reverts to its previous level of £125,000.

Anyone earning in excess of £20,000 will see an increase in tax, and a further 0.5% increase in National Insurance, for both the employer and the employee.

Missed by some, the 40% tax threshold has remained the same. This means that anyone getting a pay rise this year, who is already close to this level, will now fall under the 40% income tax rate for the first time.

Spending will be capped at £32bn (the same as last year) although there are expected to be further ‘efficiency savings’. In the long term though, spending is expected to slow down.

Pay rises for Government employees are to be capped at 1% from 2011 onwards.

Plans to increase the inheritance tax threshold, from £325,000 to £350,000 were postponed until 2011. It is estimated that over 100,000 additional homes will be caught by this, as a result.

Conclusion

On the face of it, there are more highs than lows in this budget, but is it enough? The current economic climate demands immediate and dramatic action.

Unfortunately, the Pre Budget Report has been prepared by a Chancellor who (a) has a history of excessive optimism, and (b) will not want to ‘rock the boat’ too much, in the face of an upcoming general election.

Mr Darling has hinted at future tax hikes and cuts in spending, but ‘not yet’.

There are one or two popular moves, such as the super tax on bankers’ bonuses as well as some of the new greener policies and help for the youth of the country, but, once again, we have to ask; “Is it enough?” The statement that; “anyone in work will always be better off than they were on benefits” is a bold and admirable one, but is it really achievable, and, more importantly, how will it help the expected £178bn deficit this year?

Once again, it remains to be seen.

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For those of you with no life, and loads of time on their hands, we have reproduced the full transcript of Mr Darling's Pre Budget Report Speech on our web site.

Check it out at http://www.1stadditions.biz/cdata/33039/docs/2213990_1.doc

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.

Conclusion

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. http://www.hmrc.gov.uk/pbr2008/measure1.htm