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EY's Budget News 2012 - Budget Alert - ITEM Club - EY - United Kingdom

Budget Alert 2012ITEM Club comment

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With the economy still in a downturn, there was little good news in the Chancellor's Budget.

With the economy continuing to frustrate his fiscal plans, the Chancellor appeared to be stumped for good news in his Budget speech.  He was certainly strapped for cash to fund the increase in the personal tax allowance, and even this had to be delayed until April next year, blunting its effect on the headlines.

The Chancellor took a big political gamble with the so-called simplification of the age related income tax allowance. This will come as a nasty surprise to the burgeoning and increasingly vocal private pensioner population, when it is still reeling from falling annuity and savings rates, unable to realistically offset the effect on living standards. This measure will have little impact to start with but will save a hefty £1¼bn by 2016/17 and obviously much more in subsequent years as the allowance is progressively restricted.  All of the other revenue raising measures pale into insignificance by comparison.

The day got off to a bad start with the release of last month’s fiscal figures which revealed a sharp fall in tax receipts, making this the worst February for borrowing on record.  That put paid to previous speculation that although the economy was still underperforming, government borrowing would come in around £10bn below the £127bn projection of the Autumn Statement. In fact, the Office for Budget Responsibility (OBR) thinks that borrowing will be just £1bn below that projection, leaving the Chancellor practically penniless. The best gloss that he could put on this was that the OBR growth forecast has edged up from 0.7% to 0.8% this year while its Eurozone forecast has deteriorated. He omitted to say that this extra 0.1% growth was offset by a fall in next year’s forecast from 2.1 to 2.0%.

Nevertheless this Budget scorecard will have some unusual distributional effects. The Chancellor spoke about the big cities and transport links of the North as well as cooperation with councils such as Manchester.  Liverpool’s enterprise zone was singled out as an example to follow.  However, his income tax measures could have a much bigger regional impact. The Budget scorecard shows the higher personal allowance costing nearly £3½bn by the time of the next election. This may be small beer in the South East, but will be very significant in the regions as the £10,000 objective comes into view.  This will eventually be paid for by pensioners on the South Coast and of course those living in large London houses.

The Chancellor also seemed to struggle for ideas for promoting growth. The plan just seems to be to cut corporation and higher rate income taxes to show that Britain is open for business, relying upon entrepreneurs to deliver the goodies in terms of growth. However, there is little sign of this happening in the OBR forecast.  Business spending is forecast to increase by just 0.7% this year despite the huge opportunities that large companies already enjoy, and a succession of business-friendly Budgets. This is down from 7.7% as recently as last November. Despite the Chancellor’s optimism about export growth, the OBR say that this will remain well below the growth in world markets, implying a continuing loss of UK market share. The balance of payments remains in deficit until at least 2016. Growth struggles back up to 2.7% by 2014 but only because interest rates remain on hold, reviving consumption. The financial markets reacted favourably on the day, but the rating agencies have already warned the Chancellor that austerity without growth will not work.

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