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This is a classical pre-election Budget with several big jumps
in expenditure concentrated to maximise political effect, only
partly offset by many quiet tax increases and with economic
policy distorted for electoral advantage.
It is full of misrepresentations. Major expenditure is presented
as tax cuts. Claimed inflation adjustments are consistently
less than inflation for benefits and allowances exploiting fiscal
drag but are consistently more for tax increases. There is a
mass of measures, well over 100 in total, with the net effects
in any sector often contrary to that claimed. Significant individual
measures differ widely from the general claims for a sector.
It is not clear that particular expenditure items are as given
in the Budget Statement. They cannot be reconciled with the
Departmental Expenditure Limits until the summer expenditure
review.
Unfortunately the Budget appears to have degenerated into
a party political broadcast highlighting choice items of expenditure
and taxation and full of fiddling details. This is all a great
pity as the Chancellor remains the luckiest, and therefore possibly
the most successful for a generation.
Through all the welter of change it is clear that middle income,
home owning, mondeo man remains the target of most tax increases
with a significant redistribution down to selected poorer groups.
Mr Rich continues to get off relatively lightly.
Tax Measures:
As a result of the Budget and phased measures: Taxation of
personal incomes is set to increase by ?.45billion. Taxation
of personal savings and assets is set to rise ?.9billion. Taxation
related to Private Housing is set to rise by ?.14billion, 18.6%
due to the loss of miras, stamp duty increases and council tax
increases. These housing related taxes, or loss of tax breaks
total ?0billion this year. Indirect taxation is set to rise
by over ?billion this year. Business taxation is stated as
falling by ?35mn this year. However the CBI, after examining
the details, claims that multinational companies are liable
to pay an extra ?billion not the ?00mn given in the Red Book.
The Budget Balance:
Total taxation in 2000/01 is projected as ?49.4billion a rise
of ?5.8 billion, or 4.7%. This understates taxation as tax
credits totalling ?0.2billion are counted as tax reductions.
Adding other receipts produces a total of ?81billion before
payments to the EU. Of each 1% of economic growth 70% is taken
in taxation so high are effective tax rates. The Treasury suggests
there has been a structural change in the economy increasing
tax take, others suggest just a forecasting error.
Total public expenditure is projected as ?70.9billion, a
whopping increase of ?5.7billion in cash terms, or 7.44%. This
substantially understates total public spending. Within this
total social security spending is projected at ?9.6billion.
However using the National Accounts pub. ONS total social security
spending is ?17.7billion in 2000/01 some ?8.1billion higher
than stated by the Chancellor. This includes Disabled Persons
Tax Credit ?.9billion, Working Families Tax Credit ?.3billion,
Public Service Pensions top-up ?.7billion and other items ?.2billion.
Total public spending is therefore ?89.1billion, an increase
of ?7.9billion. In consequence although there is a net repayment
of ?billion in public borrowing projected and a small budget
surplus the IMF has complained that UK policy is, with such
increases, pro-cyclical. At the top of a record run of growth
and sharply increased taxes a much higher surplus would be expected.
The Economy:
The Bank must respond to the situation reinforced by the Budget
by pressing harder on the interest rate brake. Forecasts of
peak base rate this year are between 6.5% and 7.5%. This maintains
the Sterling/Euro exchange rate and manufacturing jobs are inevitably
sacrificed, vide the car industry.
Both feet down on accelerator and brake will inevitably cause
the economy to swerve. The inherent lags suggest not sharply
until after the next election, assumed as spring 2001. Then
expect both recession risk and inflation risk to increase with
the peaking out this year becoming a rapid slowdown through
2001/2002. This can be seen in the Budget forecasts for the
economy of rapid growth of GDP in the range 2.75% to 3.25% for
2000 falling back to trend rates of 2.25% to 2.75% in 2001.
The margins of error on past forecasts indicate maximum growth
could be 3.75% this year falling to a minimum of 1.25% next
year, or as low as 2.25% this year and as high as 3.75% next
year. Inflation is also set to rise, certainly the headline
rate, which should exceed the RPIX projection given of 2.5%.
Expenditure Measures:
As a result of the Budget and phased measures: The highlighted
social security payments will rise by ?.1billion this tax year
and by ?.2billion in 2002/03. A number of the largest increases
are counted as tax reductions e.g. Working Families Tax Credit
others are populist e.g. free TV licences for the elderly. Education
expenditure is to rise by ?billion. Health is to rise by ?.9billion.
Road's expenditure is to rise by ?50mn, and other transport
by ?5mn. Crime fighting expenditure is to rise by ?85mn. It
is a pity these increases have been kept back until the pre-election
year. They could in part have been afforded earlier and reduced
problems caused by lack of reform, reversals of previous reforms
and often tighter cash limits than the previous government,
notably in the NHS.
Construction :
The industry will be affected by many contradictory factors.
Private housing will receive a quadruple whammy of three tax
increases and higher interest rates that should flatten the
market outside the hotspots. In these hotspots it may require
the economy to cool next year for them to do so. The stamp duty
changes will also impact on commercial and industrial property
sectors that are already vulnerable through the exchange rate
with a weak Euro, E-commerce and consumer choices. In the public
sector expenditure increases on road maintenance, other transport
and possibly crime will be useful small injections. The increased
waste levy and new aggregates levy add ca. 1% to industry costs.
Increased road fuel tax is offset by reduced ved on heavy lorries
but added to by company car taxation. The mass of measures supporting
small firm's investment and tax reductions notably on CGT will
be welcome, but of variable effect. The reform of the scheme
for subcontractors with a reduced deduction rate is welcome
but complex with other changes. The major increases for heath
and education may have little effect on construction. The overall
balance of these effects is not yet known but may as usual be
overridden by the swings of the economy.
The Measures.
In all there are over 100 tax measures that flow from the
Budget process. Of these 59 were announced in the Budget and
32 measures, several of them major, begin in 2000/01 from previous
Budgets or Statements. There are also automatic adjustments
e.g. to pensions that affect expenditure but are not stated.
Detailed updated expenditure figures are not generally provided
apart from choice items and annually managed expenditure.
The measures are grouped, listed and assessed below.
Personal Taxation : Incomes
Personal Allowances are reduced in real terms by below inflation
adjustments averaging 1.2% adding to fiscal drag e.g. the single
persons allowance rises by ?0 to ?385 or 1.15% worth ?1.00
per year at basic rate. The total adjustments reduce income
taxes by ca. ?60mn in 2000/01 compared to a full inflation
adjustment of 2.2% or ca. ?60mn.
The Married Couples Allowance abolition begins, except for
pensioner households where it is income limited and part clawed
back. This was worth ?97 per couple and its abolition increases
income tax by ?.4billion in 2000/01. Included is the completion
of the elimination of tax relief on divorce maintenance payments.
Income Tax Bands are also adjusted by less than inflation over
the past year at ca.1.4% worth ?10mn; a 2.2% adjustment is
ca. ?73mn.
MIRAS Abolition begins. This was worth ?.6 billion in 1999/00
and is projected to increase tax by ?.05billion in 2000/01
or up to ?232 per mortgage.
Basic Rate cut to 22% begins. The 1% reduction reduces tax
take by ?.35billion in 2000/01 and is worth ca.?56 per year
to someone on average earnings. It is more than eliminated by
income tax increases.
The 10% band is extended to investment income, tax reduced
by ca. ?40mn in 2000/01.
Company Car Taxation. The fuel scale charge is revalorised,
extra tax ?0mn in 2000/01. A new system based on exhaust emissions
from 2002, which eliminates the encouragement of business use.
Nics for employees and self-employed increased by widening
the bands and fiscal drag working together. Maximum employee
nics rise by 5.72% or ?29.20 per year as upper limit raised
?,842 to ?7,820 and lower limit by ?20. In addition reform
of self-employed nics also begins with increased tax of ?10mn
in 2000/01. Total nic tax take including employers is projected
to rise by ?.4billion in 2000/01 to ?8.8billion, +4.26%. The
two-step alignment of nics and personal allowances appears to
increase nics despite Budget figures to the contrary.
IP35 implementation to begin. This attacks self-employment
using companies to receive what are essentially salaries, increases
tax take ca. ?00mn in 2000/01.
Electronic filing of self-assessment tax returns to receive
a discount of ?0 each, tax take cut by ?mn in 2000/01.
Construction industry scheme for subcontractors without a certificate,
deductions to begin at the reduced rate of 18% instead of 23%,
reducing income tax by ?50mn in 2000/01. There is both consultation
proposed and various technical changes. Total direct personal
tax changes produce a net increase of ca. ?.45billion in 2000/01,plus
fiscal drag on income tax due to rising incomes. Personal Taxation :
Savings and Assets
Stamp Duty on land and property purchases to be increased by
0.5% above ?50,000 and ?00,000 to 3% and 4% respectively,
extra tax take ca.?85mn in 2000/01. This is becoming both a
wealth tax and southeast congestion tax. Note Stamp Duty also
applies to stock market transactions and non- domestic property
but registered social landlords will be exempt. The highest
rate equals office rental yields and is likely to produce distortions.
Stamp duty has become a significant tax raising ?.2 billion
from all sources in 2000/01.
Stakeholder pensions integrated tax regime from 2001. Cost
to Revenue ca. ?50mn in 2001/02 and ?20mn by 2002/03.
Isa's first year allowance of ?000 and cash limit of ?000
extended a further year. Cost to revenue ca. ?0mn in 2000/01.
New all-employee share plan to begin. This is less favourable
than previous schemes and reduces revenue by ca. ?20 mn in
2000/01 rising to ?70 mn in 2002/03.
Inheritance tax starting point raised by less than inflation
or ?,000, 1.3 % to ?34,000, tax reduced by ?5mn. A 2.2% adjustment
would be a ?,000 threshold increase.
Capital gains tax threshold increased by ?00, 1.41% to ?,200.
10% rate band extended to capital gains. However countering
use of gifts and trusts begins increasing tax take by ?50mn
in 2000/01.
Council tax increases by an average of 6.25% or ca. 3 times
the rate of inflation as a consequence of the budget settlement
with local authorities. The council tax-take rises by ?00mn
to ?3.6billion. Total tax on personal assets and savings rises
by ?15mn in 2000/01. The overall personal tax increases related
to private housing are ca. ?.14 billion, or 18.6%, to a total
of around ?0billion per year, counting loss of miras, stamp
duty and council tax. This is ca. 1.5% of the value of the private
housing stock.
Indirect Taxation
Road fuel duty is increased by an average of 3.4%, except for
ultra low sulphur petrol, adding ca. 2p per litre to prices
and raising ?15mn in extra tax. Cost to a typical motorist
is ca. ?0 per year.
Vehicle excise duty on cars frozen this year but is to rise
by ? to ?60 or ?05 for the reduced rate in 2001/02. The lower
rate will then be extended to 1200cc, and emissions based system
introduced for new cars.
VED on lorries for 2000/01 is being cut for 38 and 40 ton,
set at a lower level for the 44 ton 6 axle in 2001 and rise
in line for cars for the smaller vehicles. These reductions
acknowledge the excess taxation on an international industry
and will reduce tax by ?5mn in 2000/01.
An aggregates levy on new production to begin in 2002/03 at
an initial rate of ?.60 per tonne to produce ca. ?85mn in
the first year. This is ca. 0.64% addition to construction industry
costs.
VAT registration level to rise by ?,000, 1.96% to ?2,000
saving ?mn in tax.
Landfill tax to rise by ? to ?1per tonne and tax take by
?0mn in 2000/01. Minor adjustments to landfill tax to avoid
taxing sorting prior to filling and to ensure the landfill is
taxed.
Tobacco duty increased by 8.41% ca. 25p per packet of 20 to
produce an estimated extra ?75mn. This is coupled with more
draconian enforcement to create a clever smugglers charter.
Alcohol duties frozen on spirits, and increased by 3.41% on
beer, wine etc to increase tax take by ?40mn, again more enforcement
and more incentive for clever smugglers
A further 7 minor changes make a net ?5mn reduction in indirect
taxes, including reduced vat rate extended on energy saving
materials. Overall indirect taxes are increased by ?,125mn
in 2000/01. Business Taxation There are 30measures affecting
business taxation, 20 from this Budget and the balance from
previous Statements or Budgets. The net effect is to reduce
business taxation by a mere ?35mn in 2000/01, by 2002/03 this
diminishes to a ?19mn reduction. Within this negligible change
those items expected to create changes above ?00mn per year
are listed below. Please note that some businesses will face
substantial tax increases. In the mid term medium to small businesses
may benefit significantly.
Transitional relief for non-domestic rates of ?80mn in 2000/01
turns into a rise of ?20mn in 2002/03, a ?00mn turn-round
overall.
Capital Gains Tax reforms announced in the Budget are offset
by ant-avoidance measures to produce a net reduction of ?05mn
in 2001/02, but some companies face increased capital gains
tax. There will however be some significant winners from the
enhanced taper provisions reducing CGT for business assets to
10% after 4 years.
The Small Companies Corporation Tax 10% rate has nil effect
in 2000/01 but reduces tax take by ?40mn in 2002/03.
The SME's permanent first year capital allowances at 40% have
a negligible effect in 2000/01 but by 2002/03 reduce tax take
by ?30mn.
Changes to double taxation relief for large businesses increase
tax take by ?0mn in 2000/01 rising to ?40mn in 2001/02.
Employers Nics are extended to benefits in kind and increase
tax take by ?25mn in 2000/01, through the 0.1% offset for the
aggregates levy this turns into a ?00mn reduction by 2002/03.
Several changes increase tax take on insurance companies and
Lloyds by ?0mn in 2000/01 rising to ?40mn by 2002/03.
Those foreign companies in the "controlled" category
face an increased tax take of ?0mn in 2000/01 rising to ?50mn
by 2002/03.
The element of stamp duty that falls on business is estimated
to increase by ?60mn in 2000/01 and rise by ?46mn in 2002/03
from technical changes as well as the increase in rates.
Expenditure There are 20 expenditure measures stated in the
Red Book under Budget Measures. Several of these are stated
as tax reductions but are classified as expenditure under national
accounts definitions. 11 are from this Budget. These measures
cost ?,110mn in 2000/01 but rise sharply to ?,210mn by 2002/03.
The increase in Working Families Tax Credit, under 16-child
credit plus various incomes related benefits increases expenditure
by ?90mn in 2000/01. By 2002/03 this rises to ?,320mn before
future inflation adjustments.
The introduction of Child Credit in April 2001 and its inflation
adjustment in this Budget costs ?,700mn in 2001/02 rising to
?,180mn in 2002/03.
The ?50 annual fuel allowance for pensioners costs ?30mn
in 2000/01.
The payment of TV licences for over 75 year olds by the Treasury
from October this year costs ?45mn in 2000/01.
The increase in child benefit to ?5 per week for the first
child and ?0 for additional children costs ?55mn in 2000/01.
The increase in the pensioner's minimum income guarantee costs
?20mn.
There were other minor measures for job grants, income support
for mortgage interest, housing benefit simplification, earnings
disregard for income support, sure start maternity grant, pensioners
minimum income capital limits, etc increases expenditure by
?0mn.
In the Budget Statement the Chancellor made references to specific
increases in public expenditure beyond those noted above. Notably
on education ?billion, health especially the NHS ?.9billion,
roads ?50mn, other transport ?5mn, and crime fighting ?85mn.
However, previous Departmental Expenditure Limits are given
in the Red Book with no details of programmes. In particular
Budget increases are given as an overall lump sum unallocated
to Departments or programmes. It is therefore necessary to await
the summer expenditure review to understand specific expenditure
implications.
Sources: The Budget Speech, The Red Book, Press
Releases on taxation and the National Accounts pub. ONS.
A. Lindley 28.4.2000
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