Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, as part of Morningstar's Guide to ISAs, Pensions and Tax-efficient investing James Dowling, head of Public Policy at Lansons explains the likely outcomes from next week’s Budget.
It is no secret that the public finances are particularly tight. Government spending for the 2015/16 tax year is uncomfortably high, with the public sector borrowing forecast therefore at very real risk of being exceeded. Although we will only know the full contents of next week’s Budget report as the Chancellor of the Exchequer stands to speak, the nature of the problem George Osborne is facing is increasingly clear.
The Budget will almost certainly offer further tax raises and spending cuts
Tax receipts have, so far, held up. However, if the Office of Budget Responsibility agrees with the Bank of England’s recent downgrading of UK growth prospects, then the Chancellor needs to deliver a Budget which continues the pace of retrenchment if he is to keep on course to eliminate the deficit by 2019/20.
Pensions U-turn Poses a Problem
Politically, this creates problems for Osborne. Against an already tight fiscal backdrop, the Government’s U-turn on the pensions changes has created a further hole that needs to be filled. This means that the Budget will almost certainly offer further tax raises and spending cuts, with few giveaways of any significance, beyond the already leaked plans to accelerate progress towards a higher rate threshold, the point at which higher rate tax is paid, of £50,000 – a manifesto promise.
In practice, this means that the Chancellor will inevitably have to take a number of decisions which will be politically difficult for him to manage. The trick will be to pick battles which, with the Conservative Party split over Europe, he can deliver through Parliament without either damaging further his ability to manage the party, or his leadership ambitions.
Taxes Will Be Raised – But Where?
With the Government forbidden by law from increasing the headline rates of VAT, income tax and National Insurance, the most likely candidates for revenue-raising through tax are either increases in duties particularly fuel duty or base-broadening by removing exemptions and reducing lower rates on areas such as income tax or VAT. Consequently, there is growing expectation that Osborne will increase fuel duty for the first time since 2011.
With fuel prices at record lows, it is likely that the impact of this will be manageable. Action on tax avoidance is also certain – no doubt aimed at both individuals and corporations. The fiscal impact of this is often over-stated, but they are likely to look at this very aggressively – partly to plug a financial hole, and partly to offer much-needed political cover for any concessions they do offer, particularly, to corporate Britain. Any action here will therefore be accompanied by heavy political rhetoric aimed at both personal and corporate avoiders.
Salary Sacrifice to Take a Hit
Other sources of potential income include the restriction of salary sacrifice schemes – something that has clearly been in the Treasury’s crosshairs since they announced at the Summer Budget that they were looking at it. Insurance Premium Tax – increased at the last Budget – is another possible move. It was the largest single revenue raiser at the summer Budget, and the Chancellor may be tempted to increase it slightly again.
However, if they do opt for this, an outright increase in the main rate is probably less likely than a widening of its scope to other insurance lines or increase of the lower rate. Others have mentioned options such as increasing capital gains tax rates or, for example, increasing stamp duty on shares. All these are possible but, on balance, we are probably unlikely to see aggressive action here.
A Helping Hand for Business
On the giveaways side, these are likely to be few and far between. Beyond the income tax changes already flagged, the political Treasury is most interested in helping corporate Britain – so in an ideal world would want to offer further easing on corporation tax and especially National Insurance. However, it is questionable there is financial scope for these this time round. The Chancellor will, however, be keen to meet the calls of the CBI by offering further incentives to invest. His habitual lever here is an extension or increase in the generosity of investment allowances – and the CBI have this time round called for the scope of the allowance regime to be widened to many more types of property and equipment; given the expense involved, this is far from certain. It is probably the more likely route through which business might benefit from this Budget.
One part of corporate Britain that is likely to benefit, however, is small business. The immediate action is more likely to be on the simplification or deregulatory side, which costs the exchequer relatively little. However, areas to look for include action on alleviating the burden of rates, simplification of small business tax – with the possible publication of a roadmap specifically for small business – and further devolution of rates. One area of Britain that will be welcoming these changes, and potentially further good future investment news from the National Infrastructure Commission, is the North and the so-called Northern Powerhouse. The Chancellor will be keen to take political credit for any commitments to the North.
Will There Be for the Bankers?
Another part of corporate Britain that will be watching – probably in vain – is the banking community, for any movement on banking tax. Small businesses and building societies have been lobbying the Chancellor for relief on the corporation tax surcharge, which comes into force this April. It would be surprising if the Treasury moved on this – it will cost them money and, crudely, there is limited wider political support which would require action.
Finally, we can expect an update from the Government on the Financial Advice Market Review. Whether they will be taking on any of the conclusions of the Independent Review of Retirement Income is unclear. However, in the medium term, the implications of pensions freedom are clear: advice needs to become much more accessible to the mass market. Action from the Government to this end is a matter of when, not if.
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