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Prepare for budget overload
With the government set to deliver its 2010 budget on 24 March, ahead of an expected May general election, businesses and individuals alike may find it more difficult than usual to analyse what any changes will mean for them.
After all, the Conservatives have stated that if they win the subsequent election, they would hold an ‘emergency budget’ within 50 days of taking office, which would be likely to render much of the previous budget meaningless. Even if Labour were returned to power, it is possible that they would look to implement tougher spending cuts or tax rises once the election is out of the way, while in a hung parliament, no-one knows for sure what will happen.
So, why have a pre-election budget at all if much of it is likely to be superseded a few months down the road? Well, late March is the usual date for a budget and there are certain technical reasons why one is necessary. For one thing, some taxes, including income tax, are ‘annual taxes’, and as such have to be renewed each year. In addition, several measures put forward in last year’s pre-budget report, need to be enacted in the budget – including the ‘anti-forestalling’ measures to stop people avoiding next year’s reduction in tax relief on pension contributions. Finally, there is, of course, a political dimension – the budget will provide the last major opportunity for the present government to set out its economic stall.
However, an election in May or June will mean there will not be the normal amount of time to debate the proposals, so it is likely the government will cut short – or ‘guillotine’ – the debate, to only bring in the most important changes.
Even a cut-down budget will give a useful indication of Labour’s thinking on tax and spending plans for the next few years, while seeing which measures are supported or opposed by the Conservatives and Lib Dems will provide similar insight. Normally, proposing tax rises before an election would be a complete political no-no, but given the state of the public finances, and the dangers of not doing anything to address the budget deficit, the government may decide it is necessary, and even desirable, to propose some ‘responsible’ increases.
Given recent proposals such as the 50% income tax rate, the restrictions on pension tax relief for high earners, and the bankers’ bonus tax, further measures to target the better-off cannot be ruled out. A rise in VAT is also a possibility, given that the UK rate is currently one of the lowest in Europe and business leaders have recently called for such a tax hike as a less damaging alternative to the proposed increase in National Insurance from 2011, while ‘sin’ taxes – on alcohol, tobacco and petrol – are perennial soft targets when a government needs to bring in more cash.
Finally, a word of warning – a second budget in 2010 would give the new government, of whatever colour, a second chance to raise taxes in a year. This would, of course, be followed by a new pre-budget report in the autumn. It is likely to be a busy time for accountants, while anyone looking to shield as much of their income from tax as possible will need to keep a close eye on what changes are proposed over the coming months.
John Kinsella
Watson Buckle