Budget economic outlook: expert predictions

With the Budget announcement less than two days away, we've rounded up some industry predictions and commentary on what the economic outlook for the 2012 Budget will be.

What are your economic predictions likely to be on Budget day?

 

The Ernst & Young ITEM Club

The Ernst & Young ITEM Club Outlook for Financial Services predicts that the real effect of the ongoing funding crisis in the banking industry will begin to be seen, as overall bank lending contracts for the first time since 2009. SMEs, commercial real estate and personal customers who fall outside of standard credit terms will be hit particularly hard. The growth of payday loan companies and alternative corporate funding vehicles is also set to continue at pace, as the paralysis of bank lending opens up the market further to alternative or ‘shadow’ banking at both ends of the market.

Click here for the full report from February 2012.

 

The IFS

A £10,000 personal allowance: who would benefit, and would it boost the economy?

The Government has an ambition to increase the income tax personal allowance to £10,000 by the end of this Parliament. James Browne investigates how much it would cost the Government to reach this ambition, who would benefit and what the economic impact might be.

 

Forum of Private Business

Incentivise behaviour that encourages investment in UK businesses:

  • Reduce the tax on interest received during the lifetime of a loan to 0%, instead of the 50% top tax rate, providing the loan is still outstanding after three years;
  • Implement 20% income tax relief on loans (a loan of £100,000 would cost a lender paying top rate of tax £80,000);
  • Provide additional tax relief if a business fails before the loan is repaid – the lender could claw back up to 50% income tax relief (at the top rate) on money lost if the firm fails, in addition to tax saved when the loan was issued.
  • Consider a short term cut in VAT in the housing sector In order to stimulate the construction industry and help boost the industry and create jobs. The Government could cut VAT on home improvements. 

 

Read their Tax and Budget Panel Report.

 

Baker Tilly

Strategies for Growth:

It seems that economic strategy has shifted from fostering growth to shoring up government finances.  As a result, we can be pretty sure there will be no substantial tax cuts in the March 2012 Budget.  It is more likely that we will see a limited number of focussed tax hikes intended to make the UK tax system more progressive.  To use the words of the Prime Minister, these will ensure that broader backs bear most of the load, while perhaps also funding modest tax cuts for others. 

All of this comes at the end of a period when tax has become the news. A veritable storm of ideas has beset the Prime Minster and the Chancellor.  For them the priorities are to maximise tax revenues, restore the perception of greater social justice in the tax system, address the fears of the “squeezed middle” while somehow also keeping senior Conservative politicians on side.

The storm of new tax ideas would be comic were it not so tragic to see tax policy invented in such an inept fashion.  In recent days we have seen the Mansion Tax.  That apparently has now been dropped.  A Tycoon Tax followed although that one bit the dust in 24 hours.  Then there was mention of a Window Tax although the Chancellor subsequently admitted he was only joking.

More seriously, while 85% of people pay no income tax or income tax at the basic rate (20%) only, the jump to a 40% rate at £35,000 of taxable income creates powerful distortions. While a system of benefits and credits is intended to provide social support whilst smoothing out the worst of these “edge effects”, proposals to abolish Child Benefit for any household in which an earner is a 40% taxpayer are causing consternation.  Those who argue for change threaten what is probably Britain’s most-loved benefit.  Noises from the Treasury suggest that measures might have to be taken to soften the blow if Child Benefit is cut off in this way.  Whether that comes in the form of increasing the point of which the 40% tax band starts or through some other form of relief remains to be seen. 

However, we can be sure that Budget Day commentators will be keeping a close eye on proposals in relation to:

  • Child Benefit
  • higher-rate tax relief on pension contributions
  • stamp duty land tax avoidance

In the remaining articles in this special edition of Baker Tilly’s Weekly Tax Brief, we look at some of the possibilities.  We also show how, while there may be a storm of proposals for changes  in relation to personal taxes, the known changes in business taxes continue to reinforce the idea that Britain is definitely open for business and seeking to become more tax competitive internationally.  If the overall message for overseas business is welcoming, then perhaps one ought interpret the message for overseas investors as equally welcoming, provided they are prepared to pay their fair share of taxes here.

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