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Pre-Budget Report 2009: The elephant in the room

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10th Dec 2009
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Frank Haskew, head of tax and Clive Lewis, head of enterprise at the ICAEW explain why the chancellor’s report didn’t go far enough to address the deficit.

Since the chancellor delivered his Pre-Budget Report yesterday, many commentators have argued that the measures introduced don’t go far enough to tackle current public deficit – let alone the planned spending for next year. So was this, as many analysts have suggested, a ‘lame duck’ Pre-Budget Report that won’t count for much in the long-term?

“To an extent it was a very political budget”, admitted Frank Haskew. “We need to bear in mind that we’re less than six months away from a general election. No government can bind itself – we already saw that when the chancellor went back on a promise he’d made in relation to increasing the inheritance tax threshold – so any new government (whatever their political persuasion) wouldn’t feel bound by any promises a previous government made”.

“There’s very much a feeling that this may not be the end of the story and it is good that the number of specific measures taken has not been as bad as originally feared, but there’s still the elephant in the room – the enormous government deficit and it will need to be addressed. The chancellor hasn’t addressed the cuts in public expenditure that are required and so the incoming government – whoever it is – will want to get to grips with that fairly quickly”, said Clive Lewis.

Big tax decisions deferred

The NIC increase was a step towards letting the markets see that the government is serious about tackling the deficit, according to Haskew: “The chancellor has a serious problem trying to address the budget deficit, and the markets were expecting to see some clear evidence of how he was going to reduce it. He already announced a half percentage increase of NIC starting in April 2010, and he’s now proposing another half a percent increase for April 2011. The fact is if you’re going to raise significant sums of money to address the budget deficit, you can’t expect to get the money from a small group of people – it has to be a broadly based tax revenue increase – call it what you will. NIC is one place to do that”.

Despite this, Haskew agreed that many of the big decisions on tax appear to have been deferred for the time being: “I think they clearly have, if you look at the red book for 2010/11 at the moment, it’s actually showing that the chancellor is going to be borrowing another billion pounds compared to what he had in the Budget 2009, so the PBR 2009 isn’t showing a fiscal tightening by comparison with what he did in April, in fact if anything it is a billion pound loosening, so all the tax revenue rises are not coming through until 2011/12 at the earliest”, he said.

Small businesses not too badly off
Despite issues with tackling the deficit, the Pre-Budget Report was reasonably kind to small  businesses, says Clive Lewis: “From the small business/enterprise perspective, the two measures we were rooting for have been covered to some degree – namely the HMRC business payment support scheme, which the chancellor said would continue ‘for as long as it’s needed’, and the extension of the enterprise finance guarantee scheme by six months. We would have liked to see that extended for longer, but at least it will remain until after the election. It will offer struggling businesses a bit more leeway with banks and keep the finances flowing for at least another six months hopefully until recovery is a little more established”.

“There was a lot of concern that small businesses could be hit with major changes. They actually deferred the 1% increase in corporation tax for a further year. There’s been a lot of talk about measures to combat small companies paying income out by way of dividends, and we haven’t seen any measures on that at all.

“In terms of support for small businesses, given that we’re facing a massive budget deficit and earlier on this year the chancellor did say that small businesses would have to suffer their share of any pain, I think by and large they’ve not come out of it too badly”, commented Haskew.

Employment and skills

The chancellor introduced a number of measures aimed at improving employment prospects and skills among various groups. Lewis welcomed the measures but argued more need to be done: “We welcome any initiative aimed at improving skills, but we’ve still got a long to go on the whole skills agenda. Far from keeping up with it and improving our competitive position, we are very much in danger of slipping back in this area.

“We know from research we’ve done that during the recession businesses have cut back on skills training and anything the government can do to incentivise skills training is good, particularly training for people who are out of work – which is what this measure is aimed at – and older workers. It’s certainly a step in the right direction but certainly more needs to be done”.

 

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By gg
11th Dec 2009 09:50

NIC increase is from 2011, not 2010.

The 0.5%, now 1%, increase for NIC is effective from April 2011, not 2010, isn't it?

Or have I become delerious from trawling through all of the output from the PBR?

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By Gina Dyer
11th Dec 2009 12:09

Sorry

You're quite right, it's April 2011 not 2010. That was my mistake, not theirs. Confirmation comes from Rebecca in this article:

https://www.accountingweb.co.uk/topic/tax/pre-budget-report-2009-summary...

Sorry!

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