The Chancellor of the Exchequer today delivered his second – and potentially penultimate - Budget. Much of the Budget had previously been trailed in the press with pre-emptory briefings taking place all over Whitehall as a means of both damage limitation and managing expectations. Whereas some budgets are ‘Family Budgets’, others are ‘Business Budgets’, some are ‘Stabilising Budgets’, this is likely to be seen more as a ‘Waving Not Drowning Budget’ or, in official terms a ‘Credit Creating Budget’ with measures to help householders and support investment central and a keen focus on child poverty at one end of the spectrum and help for the elderly at the other.
With the economy apparently in the worst position in peacetime Britain, the Chancellor pledged to spread prosperity and invest and grow our way out of recession (as opposed to borrow and spend, although it may well amount to the same thing, it’s simply a matter of the spin…) In the event it is not a radical budget with spending carefully set against savings and some intended increases in tax revenues with more savings and spending cuts forecast in subsequent years, however, there are some stand-out measures particularly on tax, housing and green issues set out in more detail below.
One of the big questions for those involved in construction, development, housing and infrastructure was whether or not the Government would extend a helping hand to these industries in the same way that it has done for banking, motoring and several other industries. To date, these sectors have been left to fight on their own with no form of bail outs or subsidies offered and, in some cases, with public funding being withdrawn (such as in the further education sector where construction companies have lost the lifeline of contracts to redevelop colleges across the country due to the cuts to the budget of the Learning and Skills Council).
The Figures
The Government expects the economy to start growing again towards the end of this year. The Chancellor started by comparing our exports favourably in comparison to other countries, however,this is largely due to the weakness of sterling so is not necessarily a badge of honour for the Government. The Chancellor also confidently announced that the total fiscal support given to the economy by the government has protected over 500,000 jobs – a difficult claim to either prove or disprove.
The UK economy contracted by 1.4% in the last quarter and is expected to contract by the same amount in the first quarter. The economy as a whole is forecast to shrink by 3.5% this year with growth of 1.25% forecast for 2010 (against forecasts much lower than this by other economists). Further growth of 3.5% expected from 2011 onwards (this was met by significant incredulous laughter). The inflation target remains unchanged at 2% with consumer inflation expected to fall to 1% by the end of the year.
UK net debt will increase from 59% to 64% eventually increasing to 79% in 2013 as a share of GDP before it begins to fall and come back into balance allegedly over a two year period. Government borrowing of £175bn this year and £170bn next year with further borrowings over the subsequent two year - a significant increase but the instant reaction from the markets appears to be sanguine and certainly not indicating cause for panic. That said, it will take at least a day for the detail of the Budget contained not within the speech but within the reams of supplementary documents to be analysed and assessed.
Tax and spending
Tax revenues have decreased sharply. But, instead of introducing tax rises and spending cuts, the Budget has instead focused on closing tax loopholes and tightening regulations to reduce tax avoidance - the Chancellor predicts a £1bn tax take through these measures. However, this can only be a short term windfall measure and is unlikely to provide the economic boost that is required.
In a surprise move, a new rate of income tax of 50% will be introduced in April 2010 for people earning over £150,000 per year (the Pre-Budget Report last November had announced a new 45% rate, the increase to 50% will no doubt delight the Liberal Democrats and those Labour backbenchers who will see this as a means of Labour returning somewhat to its roots. At the same time, it is an open goal for the Conservatives who have already jumped on this as demonstrating the broken promises of the Labour Government). Those with incomes over £150,000 will also have tax relief on pensions cut from April 2011. Those with incomes over £100,000 will have their personal income tax allowance cut. Both of these measures may well have more of an impact than the increased income tax rate as they will be more difficult to avoid.
Although the immediate city reaction and reporting of this is likely to be largely negative, the majority of the population may well be supportive (arguably, those commenting in media and city circles are disproportionately affected by this in comparison to the rest of the country and are perhaps not best placed to make objective commentary).
The Chancellor also announced a number of measures to assist pensioners – including ensuring that the state pension increases rather than being pegged to growth and inflation. In addition, he announced an increased savings threshold for pensioners plus an increase in the annual limit for investment in ISAs to £10,200 of which £5,100 can be invested in cash – to be introduced immediately for those over the age of 50 and later in the year for everyone else.
The Government has come under fire recently for reducing money being invested in job creation and unemployment schemes at a time when it is needed most. The Budget set out measures to help the young unemployed, creating a 1980s style community work programme and increasing resources going to JobCentre Plus and unemployment support to £1.7bn. From January, everyone under the age of 25 will be offered a job or a training place to help them gain skills - this is intended to be a contrast to the approach taken by the Conservatives in the 1980s. Over £260m will be invested in training and subsidies in sectors with strong demand.
Duty
The Chancellor pressed ahead with increases on alcohol and tobacco duty with an increase of 2% on alcohol from midnight tonight, adding 1 penny to the price of a pint of beer, 13 pence to the price of a bottle of spirits and 4 pence to the price of a bottle of wine. In tandem, an increase of 2% in tobacco from 6pm tonight adding 7 pence to the price of a packet of 20 cigarettes. This will no doubt grate with those seeking to forget their troubles over a pint and is certainly something that was not lost on David Cameron who always has an eye for the populist policy…
Housing and Regeneration
The Budget was widely trailed as including a housing rescue package to the tune of £1bn; the big question being how much of this £1bn had already been announced and was simply being repackaged. In the event, there was perhaps a greater than anticipated investment announcement, possibly stemming from the £16bn of revenue which the Government anticipates receiving through the rationalisation of Government assets and property, which also provides the ability to introduce the significant green measures.
As expected, the Government has extended the Stamp Duty holiday on homes costing up to £175,000 by three months to the end of the year. However, despite repeated calls from industry and consumers the Government did not increase the threshold for Stamp Duty or revise the escalator meaning that many of those in the south east will continue to be hit hard by Stamp Duty costs. In addition, a further £80m is to be invested in the ‘HomeBuy Direct’ shared equity scheme – critics have pounded this measure pointing out, to date, no sales have been agreed under HomeBuy Direct, alleging that this is simply a way of the Government sidestepping its responsibility to improve the market for first time buyers.
The majority of the efforts focuses on first-time buyers, previously mothballed schemes and social housing – much of which is likely to fall into HCA initiatives. With the Government acknowledging the effect that the lack of finance has had on housebuilders, the Chancellor announced £500m of extra financial support to kickstart building on housing projects currently stalled because of the credit crunch (the £80m HomeBuy money is included within this). In addition, £100m will be provided for local authorities to improve energy efficiency in housing. The detail of specific schemes and how this will be allocated is to be announced separately.
The Government is looking for the major banks to increase mortgage lending by £20m to ease the market, as a stimulus to this, the Chancellor announced a securities backed scheme to guarantee mortgages.
The Budget also introduces new pilot city-region arrangements for Greater Manchester and Leeds with the intention of enabling the city-regions to benefit from the integration of planning, housing, transport, regeneration, employment and skills programmes in a similar way to the arrangements in London (although without the mandate of a directly elected Mayor). The pilots will be overseen at Ministerial level. Further work is also underway with partners in the West Midlands on their proposals for an accelerated development zone and employment and skills.
Responding to criticism over the state of armed forces living quarters, Alistair Darling also announced £50m to accelerate the modernisation programme for accommodation for the armed forces.
Business
The 2008 Pre-Budget Report announced a temporary, one-year extension of loss carry-back for businesses from one to three years, for losses up to £50,000. The Budget today announced further enhancements to this support, extending this enhanced relief for two years rather than one (from 24 November 2008 for companies, and for the 2008-09 and 2009-10 tax years for unincorporated businesses). As announced on 31 March 2009, the Government will enable businesses to spread the payment of the April 2009 uprating to business rates over three years. The Government will also allow those affected by the end of the 2005 transitional relief scheme to spread payment of the increase in their bills over three years. Loss-making companies will also be entitled to reclaim tax back on profits made in previous years, enabling them to balance out losses and sustain themselves during the recession.
In further concessions to the motor industry, as announced recently, a scrappage scheme is to be introduced next month allowing cars over 10 years old to be traded in with a £2,000 discount towards new vehicles. This has already been criticised for being at odds with the measures on climate change set out below) by encouraging people to continue to use polluting vehicles until the 10 year mark.
Climate Change, Energy and Waste
Overall, a £1bn package to combat climate change with the Budget setting out the world’s first carbon budgets setting a legally binding 34 per cent reduction in emissions by 2020. The Government aims to meet these carbon budgets through domestic reductions alone in the non-traded sector, without using offset credits – a move that will pacify the awaiting critics from the green movement who had already lambasted the Government for suggesting that offset credits may be used. In order to achieve this, the Chancellor announced:A £750 million Strategic Investment Fund to support advanced industrial projects of strategic importance, of which a third of the funding will be earmarked specifically for low carbon projects
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£405 million to support low-carbon industries and advanced green manufacturing, to help make the UK a worldwide leader;
- that UK renewable and energy projects stand to benefit from up to £4 billion of new capital from the European Investment Bank, removing blockages in project financing;
- £525m of new financial support for offshore wind farm projects that reach financial close between now and 2011 through the Renewables Obligation. This is worth £3.5bn over the lifetime of projects and is expected to support £9 billion of investment and power up to 2.8 million homes;
- extending support for combined heat and power (CHP) through climate change levy exemptions from 2013 to 2023, helping bring forward £2.5 billion of investment and 3 GW of capacity by 2015, and supporting employment; and
- a new funding mechanism to support up to four carbon capture and storage demonstration projects, and £90 million to fund detailed preparatory studies.
- an increase in fuel duty of 2 pence per litre on 1 September 2009, and of 1 penny per litre in real terms each year from 2010 to 2013. This will contribute to medium term fiscal consolidation, and save 2 MtCO2 per year by 2013-14;
- a continued increase in the standard rate of landfill tax by £8 per tonne on 1 April each year from 2011 to 2013, to reduce landfill in a sustainable way by encouraging further investment into alternative waste management options. The lower rate, applying to inactive wastes will be frozen at £2.50 per tonne for 2010-11.
- £435m extra support to develop energy efficiency measures for homes, businesses and public buildings.
It is notable that the Government has not sought to make any headway with onshore windfarms which have attracted much opposition n areas where they are proposed. Although the Government are nominally supportive they may well be unwilling to start a major battle with the powerful and vociferous anti onshore lobby that has developed – particularly not in consideration of the bruising process of eco towns and the battle that is sure to be looming over nuclear power.
In tandem with the climate change initiatives, the Government has also today announced a consultation on aspects of the landfill tax legislation, specifically: the definition of a taxable disposal of waste at a landfill site; and the definition of wastes that should qualify for the lower rate of tax. It is likely that the ultimate result of this will be to increase landfill tax for much of the waste that is currently sent to landfill, thereby further encouraging the move towards new technologies and alternative means of dealing with waste.The Budget stopped short of introducing ‘Green Taxes’, a measure which is likely to be held off until the economy shows solid signs of recovery, at which point there are likely to be a series of tax increases and spending cuts as the Government seeks to begin to refill the rather empty looking coffers. Whether or not the current Government will survive to see such measures implemented is a different matter entirely.
Summary
With the local and European elections looming, the Government will hope that it has done enough to recover some ground that has been lost with the electorate. However, with the Conservatives in a strong position and currently promoting policies that sit well with the concerns of the electorate (whether or not these are election promises or real promises is immaterial at the present time) it is likely to be a rocky road for the Labour Government as it enters the summer period.
The Chancellor robustly defended its decision to increase borrowing as a response to the recession using fiscal easing this year followed by fiscal tightening over subsequent years in order to reduce the budget deficit over a four year period. To an extent, it may be a lose-lose situation for the Chancellor; to increase borrowing and public spending may be seen as ill-judged short termism. However, to hold back and offer no incentives for struggling families, industries and UK Plc would be seen as a sign that the Government is either impotent or unwilling to make the decisions that need to be made in order to begin to rectify the situation. On the opposite side of the House, the Conservatives are clearly relishing an opportunity to take the upper hand on the economy, they are in more of a win-win situation as every figure and statistic is subject to challenge – lies, damned lies and statistics has never seemed so apt…
Written by Stephen Byfield