United Kingdom Budget 2010 Political Briefing

Commentary by Razi Rahman, Director Public Affairs

Just weeks before a General Election, the Chancellor of the Exchequer, Alistair Darling MP, today presented his Budget Statement to the House of Commons.  Given the fragile state of the economy and the poor state of the public finances, this Budget was never going to contain the tax cuts and spending increases that have been the hallmark of so many pre-election budgets, under both Labour and Conservative Governments.  However, such limited room for manoeuvre did not alter the fact that this was a clearly a political Budget in content and presentation.

In a confident speech, Mr Darling set out the scale of the challenge that the UK economy had faced, “emerging from the deepest global recession for over 60 years” and the choice faced by the Government, “whether to intervene to rescue the financial system or stand on the sidelines”.  The choices made by the Government, the Chancellor argued, had prevented recession turning into depression.

He stressed investment in what he described as “the industries of the future”, argued that the Government should actively support people and businesses “achieve their ambitions” and sought to draw a dividing line with the Conservatives, bringing down borrowing “in a way which does not damage the recovery or the front-line services on which people depend”.

The key difference between the parties was laid bare today.  It is an argument that we will hear again and again in coming weeks.  Whether, as the Conservatives argue, the Government must act now on the deficit to get the economy moving, keeping mortgage rates low and protecting the country’s credit rating.  Or whether, as Labour suggests, such action would damage public services and put the recovery at risk.

The Chancellor argued that the Government had a plan to reduce the deficit based on growth, tax and reductions in public spending.  On growth he restated a forecast of 1-1.5% for this year and slightly reduced next years’ growth forecast to 3-3.5%.  Some commentators regard even this revised forecast for next year as over-optimistic.

On borrowing, the Chancellor announced that as a result of higher VAT and corporation tax receipts and stronger income tax revenues, borrowing this year would now be £11 billion lower than forecast, at £167 billion.  Expect Conservative and Liberal Democrat Party politicians to point out that this still leaves the UK with a huge deficit.

The Bankers’ bonus levy, heavily criticised by commentators, but popular with the public, has in revenue raising terms at least been a success, with the Chancellor announcing that it had raised £2 billion, twice as much as the Treasury had expected when introduced.

Conscious that elections are nearly always won on visions of the future, rather than on records of achievement, the Chancellor today announced a £2.5 billion one-off growth package – to help small business, promote innovation, and invest in national infrastructure and key skills.  The Chancellor claimed that this would be offset by making savings in departmental budgets.

A headline announcement in today’s Budget was the exemption from paying stamp duty for first time buyers on properties up to £250,000.  The Conservatives will be frustrated that this was in fact their policy, first announced at the Party Conference in 2007.  The Chancellor also announced that a Stamp Duty rate of 5% for purchases in excess of £1 million – a move that some will characterise as a “mansion tax”.

In respect of higher earners, the Chancellor confirmed the announcements made in last year’s Budget that from next month there would be a new 50% rate of income tax for those earning more than £150,000 a year and the withdrawal of personal allowances for those earning more than £100,000.  Although there were no further announcements in respect of income tax, it should be noted that the Chancellor failed to increase personal allowances in line with inflation – meaning the majority of taxpayers will pay more tax next year.

Much of the debate in recent days between the Prime Minister and his Chancellor has focussed on the planned increase in fuel duty, with No11 arguing that it should be deferred.  In the event, there appears to have been a compromise, with the increase being phased over the year.

There was no increase in VAT, but with the UK enjoying a lower rate than many of its EU counterparts, expect this to be revisited after the election whichever party wins.

Mr Darling brought cheers to the Labour benches in the House of Commons as he announced a crackdown on tax evasion and stated that new agreements would be signed with the governments of Dominica, Grenada and Belize – home of the Conservative Party donor, Lord Ashcroft.

In recent days, expectations had been set for today’s Budget, with the Chancellor and Treasury officials briefing that it would be “sensible” and “workmanlike”.  Critics however will argue that this was a Budget that ducked the tough decisions – leaving the difficult choices on public spending cuts to the Spending Review next year or an emergency Budget should there be a change in Government.   In responding to the Budget Statement, the Leader of the Opposition, David Cameron MP, argued that the Labour had decided “don’t do anything before the election, let’s just sit tight and keep our fingers crossed.”  Nick Clegg MP for the Liberal Democrats stated that “this Budget was a political dodge not an economic plan”.

Although the lack of detail on public spending cuts has drawn criticism from both the Opposition and the media, political strategists from all parties acknowledge that no government would want to open itself up to the political attack that would result from spelling out detailed plans at this point.  Note that although both the Conservatives and the Liberal Democrats have called for such detail, their own plans are somewhat vague.  They, too, are concerned about opening themselves up to criticism just weeks before an election.  Whether all three parties can continue with this lack of detail through the intensity and scrutiny of a campaign remains to be seen.  What is certain, however, is that whoever wins the election will face the toughest public spending decisions in a generation.

At a glance:

• Forecasted growth for 2009-10 is between 1 and 1.5%, and for 2010-11 is between 3 and 3.5%.

• Borrowing for 2010 is forecast to be £167 billion; which is £11 billion lower than predicted in December.

• HM Treasury’s tax plans will raise £19 billion towards reducing borrowing.

• £2.5 billion growth package to support small business, funded by revenue from bankers’ bonus tax.

• 2 year stamp duty relief for first-time buyers on properties up to £250,000, and a 5% stamp duty introduced on properties over £1 million.

• Creation of a Green Investment Bank, with £1 billion of investment.

• Confirmation 18-24 year olds unemployed for 6 months will be guaranteed a job, work experience or training, plus the creation of a £270 million University Modernisation Fund.

• Allocation of £4 billion to fund operations in Afghanistan.