The phoney budget

18/03/2010 09:58:19

Thomas Story is tax director at BDO. He will participate in a Reuters Budget live blog at noon GMT on Wednesday, March 24, 2010. Please tune in and join the discussion.-

The March 2010 Budget, to be held next Wednesday, will inevitably be highly political as it is effectively the starting gun for the general election campaign. In this context, further significant fiscal measures to tackle the 178 billion pound government deficit will almost certainly be postponed.

Whatever the political colour (or colours) of the next Government, tough decisions will need to be taken in a second Budget within months of the general election. Individual taxpayers and businesses should steel themselves for a frustrating period of uncertainty as party politics overshadow the uncomfortable fiscal imperative to raise significant additional tax revenues as a contribution, alongside significant public spending cuts, to curb the unsustainable fiscal deficit.

In the wake of the credit quake we have seen a 42 billion pounds fall in tax collections. This leaves the Chancellor very little room for any tax cuts to curry favour with voters but, equally, he dare not raise taxes significantly in a Budget held only a few weeks before a general election. We can expect a ‘Phoney Budget’ on 24th March with any hard hitting, significant tax raising measures deferred until the second 2010 Budget.

So what might the March Budget have in store?

Tax rates and allowances have already been announced in the November 2009 Pre-Budget Report and these will almost certainly be confirmed in the Budget. The Chancellor might be tempted to augment the 50 percent income tax rate for high earners with a “super tax” of, say, 60 Pre-Budget Report on income over 1 million pounds, but this is an outside bet.

A cut in the headline rate of corporation tax is a possibility, to outflank the Conservatives, who have championed this measure. This would almost certainly have to be funded by a reduction in tax reliefs such as capital allowances. Other significant fiscal reform is unlikely, as the Chancellor will be fearful of frightening the horses so close to the General Election.

The real sting in the tail will come in a post-Election June/July 2010 Budget when the Chancellor, no matter which party he represents, will face some stark choices.

There will undoubtedly be tax rises, whatever the outcome of the election. The focus will be on the taxes that hit us where it hurts; Income Tax, National Insurance and VAT as only these taxes have the potential to raise large enough amounts to put a significant dent in the 178 billion pound deficit.

I expect that VAT will rise to at least 20 percent regardless of the colour of the government.

In conclusion, I fear that the March 2010 Budget is bound to be more about ‘Punch ‘n’ Judy’ politics rather than important fiscal reforms. Sadly, it is almost unavoidable that taxes will rise after the election, in addition to cuts in government spending, irrespective of the outcome. I am convinced that some tax rises are much more damaging than others and this should be a key area of the electoral debate. However, it is almost inevitable that we will need to wait until a second Budget to find out exactly where the tax hikes will occur.