What to expect in the emergency Budget
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MoneyWeek editor-in-chief
Merryn Somerset Webb Jun 22, 2010
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I rarely find myself wanting to be a politician – or to stand in the shoes of a politician – even for a second. Not so today. Right now, I'd like to be George Osborne.
He recently received good news from the new Office for Budget Responsibility (OBR). The overall deficit (the amount we add to our national debt every year) is not quite as big as it was thought – it is forecast to come in at £155bn for 2010-11 rather than £163bn. So that's good.
At the same time, growth forecasts for the next few years have been cut hugely and the OBR says that the long-term structural deficit (the amount we spend above and beyond our tax revenues even when times are good) is much larger than expected. This is also excellent news for the Chancellor.
Why? Because it gives him a platform from which to announce a really bold and creative emergency Budget – a once-in-a- government chance to make major changes.
There's been much muttering over the last few months about how cutting spending or raising taxes now will derail our fragile recovery. I'm not entirely convinced.
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Sure, it isn't nice for people to see their salaries cut or jobs deemed to be unnecessary – and, sure, unemployment isn't much help to a consumer-centric economy. But think about what happens if we don't cut.
Right now, UK ten-year bond yields come in at 3.5%. That's not particularly high. However, they'd probably be a lot higher if the market wasn't assuming that the new government was going to take care of the deficit (and will go higher if it doesn't). And that – given the knock-on effect from bond yields to mortgage and loan rates – would be just as bad for our prospects, if not worse, than any public spending slash and burn will be.
I think Osborne gets this: he talks a good talk on deficit reduction and has already come up with £6bn of "efficiency savings". Last week, Danny Alexander, his effective deputy, further made the point by dumping £10bn worth of the previous Labour government's spending commitments.
So what can we expect from Osborne today?
Much of his budget has been well trailed. We know there will myriad cuts across the public sector and that it is likely they will focus on pay and pensions.
We know there will be something on capital gains tax (CGT) – even last week David Cameron was noting that £1bn is lost in CGT evasion every year thanks to the difference between the 18% rate and the top tax rate.
You might think the answer is simply to bring the top tax rate down to more like 25% and remove the evasion incentive. I still harbour a tiny hope for this – Osborne used to be keen on flat taxes – but I suspect my hope is in vain.
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Still, even if the CGT rate does move up substantially, I'd be amazed if there were no allowances made for the length of time an asset is held, or for inflation. Taxing people on inflation is a particularly low trick played by the state on the people. It would not mark a good start for the coalition to get into it so soon.
We can also expect something on pensions – Nick Clegg hates top-rate taxpayers getting tax relief. I'm hoping, as I wrote last week (see The UK's pension rules are too generous) to see the horribly complicated Labour rules – whereby you are to lose relief gradually once your income hits £130,000 – cancelled. In their place, I'd like to see a low flat-rate contribution limit put on instead – perhaps one that takes in the Isa allowance, too.
Then there is VAT. Across Europe, most VAT rates fall in the 19-21% range – making our 17.5% rate seem a little low. Increasing it to 20% would raise big money and make it clear to the markets that the LibCons are serious about getting the deficit down. That means, by the way, that the one positive thing you can do for yourself pre-Budget is fill the car up and buy any big-ticket items you fancy (I've ordered a fridge-freezer).
At the same time, you might expect a few fiddles such as a hike in insurance premium tax. But there could be some cuts in corporation tax – these have been promised, and would send a signal about the importance of private sector wealth creation. So would a commitment to dumping the 50% top rate of tax as soon as possible.
I'd like to think there'll be a surprise in there, too – something so bold and brilliant that none of the rest of us, accustomed as we are to governments fiddling rather than fixing, could expect.
Perhaps a halving of corporation tax, a commitment to move towards that flat tax, a total axing of middle class benefits, or a once-in-a-generation revamping of the welfare state.
Failing that, I'm just hoping that we get an overall sense of simplicity, transparency and stability. Public spending is now so all-encompassing, taxation so complicated and everything so subject to change that most of us live in a state of constant confusion. Ending that would be huge progress in itself.
• This article was first published in the Financial Times
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