The conventional wisdom is that tomorrow’s Budget will be a damp squib, and if you take a moment to consider the constraints facing the Chancellor, you can probably understand why everyone’s so convinced of this.
You’ve got George Osborne’s (silly) fiscal rules, which essentially imply that this Budget will have to be fiscally-neutral, if not a net money-raiser (I covered the rules, and the consequent black hole, in my TV report today). There’s the EU referendum, which is constraining the Chancellor from taking any decisions which would either create more divisions in the Conservative party or alienate prospective pro-EU Labour voters. Not to mention Osborne’s own desire to keep himself in the game to succeed Davis Cameron in a few years’ time.
The Chancellor’s economic parlour game comes back to haunt him as he risks breaking the fiscal rules he signed up to. Read more: http://news.sky.com/story/16…
But while there’s no doubt the Chancellor’s hands are at least slightly tied, it goes against his natural instincts to publish a Budget devoid of any big eye-catching measures. And while most Westminster insiders think the most interesting measures will be a rise in the tax-free allowance for lower and higher rate taxpayers, and perhaps even the abolition of the top rate of tax, it’s not inconceivable that the Chancellor could go further.
On that basis, and on the basis that it’s still not too late for the Chancellor to insert a few rabbits into his hat (actually, it might be too late by now, but forget about that) here are a few possible Budget measures, along with their pros and cons:
- Abolish the special tax treatment for debt
One of the longest-standing principles in UK taxation (dating back all the way to 1853) is that businesses should be allowed to enjoy tax breaks for borrowing. Tax deductability of debt (allowing companies to deduct what they pay in interest to lenders from their tax bill) was a critical industrial revolution era innovation, since politicians worried that otherwise businesses simply wouldn’t borrow to invest, dooming the country to stagnation. However, times have changed: these days many international companies use the loophole as a means of avoiding tax, the principle has been taken away from households, and anyway, the world is drowning in debt. The Chancellor has been mulling restricting tax deductability for some time, encouraged by the OECD and IMF, who think it might clamp down on corporate tax avoidance.
- Pro: PR boost from taking on tax-avoiding multinational giants.
- Pro: Could raise a decent slug of money, though no-one knows how much
- Pro: Would be a strong statement about cracking down on indebtedness
- Con: Could drive business away from the UK
- Con: Difficult to enforce, especially if other countries don’t follow suit
- Con: May actually cost money rather than raising it.
- Overhaul pensions
Yes, the Chancellor’s flunkies have signalled that he has shelved his plans to overhaul the pensions system, but I wouldn’t rule out a subtler, long-term set of changes. In the long run, the government has shown it wants to change the tax treatment of pensions, potentially shifting from a system in which payments into your pensions are tax-free to one where payments out of your pension are tax-free. Introducing this overnight for existing pensioners would have made many enemies, especially inside the Tory party, but might the Chancellor nonetheless signal that he is still moving in this direction, but perhaps limiting the changes to those starting to save for their pensions now? He could brand this as a further extension of his Help to Save policy, previewed earlier this week by David Cameron.
- Pro: Would underline the Chancellor’s reforming zeal.
- Pro: Would be a further signal that families were being given more control over long-term saving
- Con: Would still be deeply controversial and potentially alienating
- Con: Would not raise much money for many years
- Cut VAT
This would be a biggie, by anyone’s standards, but it could also be effective, both on a political and economic basis. A cut in Value Added Tax would encourage people to spend and might boost economic growth – something sorely needed right now, given there’s a genuine slowdown in train. Secondly, and more politically, VAT is one of those taxes which has become a bugbear of anti-EU campaigners. They argue that VAT rates are decided by the EU rather than by Britain – something which is only semi-true: the EU has rules about how high or low the overall rate and lower rate can be, and can vet which items are charged lower rates. Britain has always had the power to change the actual rates, though, for boring historical reasons, it cannot make shop products zero-rated and so the lowest VAT rate it can impose these days is 5%. On this point, You might remember the so-called Tampon tax, which was really a protest about the fact that sanitary towels have the 5% VAT reduced rate levied on them.
However, the European Commission is expected to reveal plans for a major overhaul of the system next Wednesday, potentially giving EU states the power to set all their own individual rates. Provided it goes ahead, that would be a major coup for the Chancellor: he could demolish the argument that the UK has lost its sovereignty to set major taxes, reinforcing his campaign to stay in the EU.
But given the EC is unlikely to implement these changes in time for the EU referendum, why not pre-empt them and cut the overall rate of VAT, perhaps offsetting the cost by increasing the reduced rate, or bringing a few reduced-rate items up to the main rate?
- Pro: Would be a major rabbit out of the hat, a policy everyone would notice in their pockets immediately
- Pro: Could be a big blow for anti-EU campaigners
- Con: Very, very expensive to cut the VAT rate – will cost about £5.5 billion a year
- Con: Might leave him open to accusations of trying to boost consumer spending, which the UK economy is already arguably overly reliant on.