The Chancellor is delivering his Budget on Wednesday and he does not seem to have much room for manoeuvre. John Whiting examines the problems he faces and beleives he will find ways to sweeten some unpalatable financial medicine. Next Wednesday, 17 April, the Chancellor Gordon Brown will rise to deliver his sixth full Budget. What with his Pre-Budget Reports (Green Budgets) as well, he’s getting a practised hand at the game but he certainly shows no sign of losing his enthusiasm for the process. So I suspect that in amongst the analysis of how well the economy is doing and what its prospects are, we can expect a good deal of time being spent on tax issues. The speculation is that taxes will be going up, but that in turn leaves us with a number of key questions:
* Does he have to raise taxes?
* If so how much?
* Which taxes?
Does he have to raise taxes?
The economy isn’t doing as well as it once was. That translates to slightly lower tax receipts, particularly because company profits are depressed. There is a gap looming between the government’s income and its spending, even before additional spending is announced. But the Chancellor probably has enough in his back pocket, or certainly has the ability to borrow enough, so that he doesn’t actually have to raise taxes for the present.
Then again we have a Chancellor whose middle name is prudence and it does seem from various leaks and comments that we are being softened up to expect tax rises now, to pay for better public services. After all, the government’s spending money comes from only two sources: taxes or borrowings. There is no magic wishing well in Whitehall that allows the Chancellor to conjure up extra monies by any other method.
Currently the government takes something of the order of £375bn in taxes from us. The likely extra tax take from this Budget seems to be around £5bn – a lot of money to you and I but not when the overall figures are borne in mind.
When might taxes be raised?
This is an interesting one. Many of us remember when Budgets meant instant tax rises. I think it’s now far more likely that we will have tax rises announced to take effect next year – from 6 April 2003. Of course it is possible that we get immediate rises but it seems more plausible that we get time to adjust and come to terms with the greater tax burden before it actually kicks in.
What are the taxing targets?
If the Chancellor does want to raise £5bn, he won’t do it by fiddling around with allowances and adjustments. There is, for example, some speculation that he will reform Inheritance Tax – but as that tax only takes £2bn in the first place, it’s not going to deliver the money he needs. Capital Gains Tax will no doubt get tweaked, but it’s the same story.
If he wants to raise serious money, there are three main areas to try:
* Income tax;
* National Insurance Contributions (NICs).
A simple move would be to raise the basic rate of income tax from the current 22%. But that is ruled out in Labour’s manifesto, together with raising the top limit of 40%. So although this would be in many ways the simplest and cleanest tax rise, I don’t think that’s going to happen. Indeed, what we will probably see is a tax cut, with an increase in the amount of income subject to the 10% “starter rate”. Currently this covers the first £1,880 of taxable income: a rise to (say) £2,000 would mean a modest £12 extra in the pocket of most taxpayers.
Our standard rate of VAT of 17½% is lower than most of our European neighbours. A rise to 19% would deliver the necessary funds and indeed if you go that far you might argue that you might as well round up to a nice round 20%! But raising VAT bears more heavily on the less well off as they spend a greater proportion of their income on items with VAT on. So it’s unlikely.
The Chancellor could extend VAT to things that it doesn’t currently cover – such as transport, new houses, basic foodstuffs, children’s clothing, books and newspapers and postage stamps. One could see a possibility of 5% VAT on new houses on greenfield sites, to encourage use of so-called brownfield land, but none of these are at all attractive politically.
This brings us inexorably to National Insurance as the most likely rise. The Chancellor could:
* Raise the rate at which people pay NICs – typically 10%;
* Raise the level at which you currently stop paying NICs – currently £585 a week;
* Raise the rate at which employers pay NICs – currently 11.8%.
The problem with the third of these options is that it would be something of a tax on jobs so it’s the first two I think are most likely. An additional 1% on NICs paid by employees (and the self-employed as well no doubt) would bring in well over £3bn. Then a hike in the level at which you stop paying National Insurance could bring in another £1bn or so. The problem with all this is that it affects ordinary working people.
What about the sin taxes?
Those favourite targets of Chancellors through the ages – excise duties on “booze and fags”, together with what nowadays seems to be a new area of sinning, namely motoring don’t have a lot of scope. Real rises in tobacco duties in particular are vulnerable to accusations that any rises merely fuels the smuggling industry. I have a suspicion that a rise in petrol duties has been pencilled in but whether the recent upsurge in oil prices deflects that remains to be seen.
And the Giveaways
All this talk of tax rises mustn’t deflect attention from the fact that the Chancellor will be giving some money away. This will be via his Tax Credits reforms – the still novel idea that the Inland Revenue can put some money back into your pocket as well as picking it. We can expect a lot of detail as to how much the Working Tax Credit, the Children’s Credit and the Pensioner’s Credit will be worth, how they are to be calculated, how to claim them, what happens if claims go wrong and so on. The fact that these credits are due to come in next year is another pointer towards any tax rises arriving at the same time.
Whatever happens, I suspect few of us will feel better off after Wednesday except for whoever benefits from the inevitable surprise rabbit out of the Budgetary hat. There isn’t much we can do about it either – possibly make sure the petrol tank is full but, that apart, I think we all have to sit back and take Dr Brown’s NICs medicine which will, no doubt, be presented as a National Health Service Surcharge.
THE TAX FIGURES TO WATCH
Income Tax 2001/02 2002/03
Personal allowance 4,535 4,615
10% Lower rate
- on first £ of income 1,880 1,920
22% Basic rate
- on next £ of income 27,520 27,980
40% Higher rate
- income above 33,935 34,515
Capital Gains Tax
Annual exempt amount 7,500 7,700
Nil rate band 242,000 247,000
The 2002/03 tax year figures are those already announced – but they may change!
John Whiting is President of the Chartered Institute of Taxation and a tax partner with PricewaterhouseCoopers.