What will Budget 2010 mean for you?

By MoneyWeek Editor John Stepek Mar 22, 2010

John Stepek

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It's that time of year again. Budget day looms on Wednesday. You probably know the routine by now, but in case you're blessedly unaware, here's what usually happens.

The Chancellor stands up and gives us a blurb about how much better off we are than a select few other countries. That'll be tough this year. But I expect he'll mention the US unemployment rate plus their house price crash, while omitting their massive GDP bounce.

He usually then makes excuses for why public borrowing is so much higher than he said it would be last year. He then makes some ridiculously optimistic forecasts with a straight face. He'll talk about hard-working families and green incentives. Then he sits down.

One side applauds, the other side carps. And then the real bad news slowly trickles out for weeks afterwards as tax experts pore over the small print, and try to figure out what it all means.

So can we expect anything different this year?

Be aware: Budget 2010 is different

Wednesday's Budget is a bit special, because there's a tightly-fought election just around the corner which has to be called by early June at the latest. And even although everyone reckons it'll be called for May 6th, I wouldn't bet against Gordon Brown hanging on until the very last moment.

The Budget is the government's last big sales pitch before then. So the pressure is on Alistair Darling to make this one count. On the one hand, we're being told that Mr Darling would rather like to make a start on fixing the shocking state of the public finances. But we're also told that Ed Balls and Mr Brown would rather he kept on spending, and delivered some pre-election sweeteners.

I don't know how much of this is true. Against most of my better instincts, I quite like Mr Darling. When he made his comment in 2008 about Britain facing the worst recession in 60 years he got it absolutely right, well before most others had admitted we were facing any sort of recession at all.

But I'm so cynical about politicians that I suspect this is a "good cop, bad cop" act designed to impress the voters before polling day. Darling plays the honest, trustworthy grafter, standing up to his boss in Number 10, and wins sympathy votes for the party in the process.

In any case, all of this "Darling vs Balls" stuff is a sideshow. It doesn't matter who wins the next election. The state of the public finances has to be tackled. That means spending cuts and tax rises too.

What this Budget will be about

So here's what this Budget will be all about - presentation. Mr Darling will present a sober face. He'll admit the public finances need to be tackled. And if public borrowing comes in below his £178bn forecast, as it may well, he'll no doubt make a big song and dance about how he won't be spending any of this "windfall". This is like being £9,900 in the red, and saying that you won't spend that last £100 of your overdraft limit – but it's the presentation that counts.

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He might even make some concession to higher taxes. Capital gains tax (CGT) is an obvious target; it ticks almost all of Mr Darling's boxes. It's basically a tax on the wealthy. Only wealthy people own enough assets to have to worry about managing CGT. Everyone else can shelter from it behind their annual allowance and by sticking their investments in an Individual Savings Account (Isa).

And the CGT threshold, at 18%, is very out of step with income tax. That creates huge incentives to try to substitute income for capital gains. That's good news if you're a provider of risky investment schemes with great tax breaks, such as Enterprise Investment Schemes and Venture Capital Trusts. But you can certainly argue that it's unfair to give tasty tax breaks to those who are sufficiently well off to game the system.

This way, Mr Darling could point to lower borrowing, and show he has a stomach for raising taxes, yet all apparently without hurting the ordinary voter. But there's just one problem. CGT raises buttons in terms of tax revenue. The government expects to make more money this year by taxing wine (that's just wine, not beer or spirit duty) than it does from CGT. CGT is set to raise £2.5bn, while wine duty will raise £2.9bn.

£2.5bn is about 0.6% of the tax that HMRC expects to rake in this year. Now that's partly because asset prices have plunged, which means there aren't a lot of capital gains to tax. But even at its peak – last year – CGT 'only' raised £7.8bn, which was a lot less than tobacco duty for example, at £8.8bn.

Taxes will be hiked - but not until after the election

The truth is that HMRC makes nearly three quarters of its tax revenue from just three taxes. Income tax (about 34%), National Insurance, which is income tax in all but name (about 24%), and VAT (about 17%). If you want to see for yourself, by the way, it's all here [pdf].

So any government that's serious about tackling the deficit is going to have to hike one of those. But it won't happen this side of the election. National Insurance has always been the tax of choice for Gordon Brown, because it's the stealthiest of the major taxes. But people are starting to cotton on to that one, and it's already going up from April 2011. And income tax and VAT won't be touched – those are far too obvious.

In short, Mr Darling will talk a big game on Wednesday. But the details will be piffling. All the major parties know that the election will be followed by higher taxes and job losses. The Budget will merely be an exercise in pretending to voters that this can somehow be done painlessly. Don't fall for it.

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Comments (13)

Published in Economics | More articles by John Stepek

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  • 1. Keith P

    (22 March 2010, 11:20AM)  Complain about this comment

    Anyone taking bets on 20% VAT? Announced this week to look tough, but not to start until October, or April 2011, to be painless this side of the election. That's my guess.

  • 2. Robert

    (22 March 2010, 11:47AM)  Complain about this comment

    Do you think there will be a New Tax introduced (50p Broadband Tax) and do you agree that this tax would only benefit the purposes of the Government for their running of Inland Revenue P.A.Y.E. & National Insurance, Tax Returns,VAT, etc. which will all have to be processed through online accounts with the various government departments. The tax would be paying for broadband access to areas which cannot be linked to government websites at the moment because they are out of reach. Also what does the government pay for their Broadband connections and/or how many do they have?

  • 3. Max H.

    (22 March 2010, 12:05PM)  Complain about this comment

    I would welcome more emphasis on the difference between the 'deficit' which is targetted for reduction and the actual 'debt' which is the real promblem which must be addressed and reduced. Even a reduced 'deficit' will still keep increasing the 'debt'. The government seems to think it can con us by confusing us.

  • 4. Matt

    (22 March 2010, 01:16PM)  Complain about this comment

    Does anybody know why the inheritance tax figure has dropped considerably over the last few years? is this a lower death rate, a tax change or are more people figuring out ways around passing their money to their loved ones?

  • 5. John

    (22 March 2010, 01:57PM)  Complain about this comment

    The budget will be another menu of waffle, dressed up to look palitable to buy votes, but in reality it will be laced with cyanide. Any wonder more UK investors are shifting to other markets overseas to find a safer home for their money, driven by the lack of confidence in this government. This budget will do nothing to change that perception, in reality on add to it.
    John

  • 6. David Goodall

    (22 March 2010, 02:08PM)  Complain about this comment

    Has anything changed?
    It is and has been a government of taxes and interferences. They want the worker to work harder they want the self employed to pay more taxes but they want us to have less rights, and less time, whilst they earn themselves their corrupt expenses, their subsidized pensions, and keep their unaccountability to us, the public, but mainly they want to control our actions tell us what to do, when to do it , what to eat, when to sleep.
    It is time for a fixed 2 year fixed term for government, not this hanging on till the last minute then giving us more lies, this time in the budget, insulting our intelligence further.
    It’s time to get something done about career politicians altogether, and put someone there who at least knows something about the job they are given.
    Old stealth tax is not even elected to the job so how can him/they justify taxing the country on anything, boom and bust are over that’s how much he knows, what a lot of clowns,

  • 7. JAW

    (22 March 2010, 02:11PM)  Complain about this comment

    Matt - Inheritance tax take was £3834 million in 07/08 falling to £2851 million in 08/09 and expected to fall again in 09/10. This is about a 25% reduction and my guess is that it is due to the property price crash that started in late 2007 and bottomed to about 30% average for the UK, property being the major item in most estates, especially in southern England. Another minor factor could be the accompanying crash in equity and other asset values, although not many estates have large amounts of equities in them. Generally, decreasing estate values in 07/08 reflect just how much people's net wealth was reduced as a result of the recession?

  • 8. Roberto Birquet

    (22 March 2010, 02:38PM)  Complain about this comment

    I do not see much difference coming from the election of one party or the other, but from the ability to make tough decisions without recourse to the electorate for another five years. The problem with democracy I suppose. I do not see many great ideas of recovery coming from anywhere. I put it mostly down to the failure of the economics profession, for lying on its laurels for 30 years. Neither left nor right has taken seriously the return of depression economics. And now we are fumbling on the dark. The election will be political? Do bears defecate among the trees? It's a budget and a final one before election - duh! The Tories regularly cut interest rates just before elections.

  • 9. Roberto Birquet

    (22 March 2010, 03:27PM)  Complain about this comment

    Some of the comments of Mr Stepek are becoming tedious. Re: the possible hyperinflation in the UK comparing the situation with the Weimar Republic.
    The talk of hyper-inflation due to a big-spending social democratic government in Germany in 1921-23.
    So it had nothing to do with a four-year war that destroyed Germany to the point of an attempted Bolshevik Revolution in 1919; nor because of the reparations post-Versailles Treaty, including the British demand in 1921 that billions be paid on gold marks - more than the entire German treasure of gold. No it was down to spendthrift socialism.
    Please; whatever mess we are in - due primarily to the debts of the private sector, which are effectively being socialised - is not the same situation. I'm willling to read MW comments, but they need to be more rigorous than mere shock headlines/ opinion pieces.

  • 10. Simon

    (22 March 2010, 06:07PM)  Complain about this comment

    Is VAT really not going to change again? Maybe not this year, but in some future budget? Given that the expectation that VAT will always be at 17.5% has been changed in the public mind after last year's reduction and then raise - is it not possible, even likely that this flexibility will be used in the years ahead, and VAT increase again?

  • 11. Alan Crawley

    (22 March 2010, 06:38PM)  Complain about this comment

    You mention that the HMRC's main sources of revenue are Income Tax,
    National Insurance and V.A.T.

    Surely you have missed the big one? What about Fuel Excise Duty?
    This one tax, because of it's severity, stifles enterprise, prices our
    manufactured goods out of international markets and makes our
    everyday shopping bills so high. What is the figure for that?

  • 12. JAW

    (22 March 2010, 07:00PM)  Complain about this comment

    An inherent flaw in Democracy as a political system is that political parties form based upon class differences and their rival economic struggles, resulting in politicians bribing the electorate with tax perks, benefits and services paid for by one class taking wealth from the other and giving it to their supporters. This results in taxation as a proportion of GDP remorselessly increasing decade by decade. It was 10% in the early 20th century and approaching 60 % today. It will get worse unless we take back power from politicians. Taxation as a % of GDP should be fixed by annual referendum in June, with a one point rise, the same, or one point fall, the only options on the ballot. Then the politicians can argue among themselves how it is to be spent in the next parliamentary session. Behave badly, spend wastefully and the public will lower the tax take.

  • 13. Suzy

    (23 March 2010, 09:39PM)  Complain about this comment

    Great suggestion JAW.

    So any benefit in crystallising gains now before CGT shoots up?

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