The Budget 2011: A Preview
by Ben Salisbury
The Chancellor, George Osborne, does not have much room for manoeuvre when he announces his budget on Wednesday March 23rd.
Most of the plans were set out in the Comprehensive Spending Review announced in October, so we have been prepared for the worst. Multi-year spending reviews were introduced during Gordon Brown’s tenure as Chancellor and provided the benefit of giving certainty and allowing companies to plan in advance. However, they have meant the budget speech itself contains less surprises.
The aim in the last few weeks has been to present this as a ‘budget for business’. How the public reacts will in part be down to whether they accept that business has to be the priority and if they believe that the price for reducing the deficit is the reduction or even loss of some services.
David Cameron’s stated aims
David Cameron has pledged to cut red tape so entrepreneurs can drag the country out of the doldrums and he has also said that the budget statement will re-engineer ‘a fundamental re-balancing’ of the economy to make the country less reliant on the financial service sector.
At the Conservative spring conference in Cardiff he said: “There’s only one strategy for growth we can have now and that is rolling up our sleeves and doing everything possible to make it easier for business to grow, to invest, to take people on.”
So, a budget for business then?
The government is relying on private business to lead the country out of recession led by a growth in exports. It is also hoping that the 490,000 people who will lose their public sector jobs in the cuts will find work in the private sector.
The centrepiece of the budget is likely to be the creation of ten new enterprise zones in a policy initiative influenced more than a little by Margaret Thatcher. At a cost of £100 million, it will be announced that ten enterprise zones are to be set up in a bid to transform depressed northern and midlands towns.
It is likely that business rates will be amended, with the possibility that local authorities will be able to retain millions of pounds in business rates. This will give councils more power over spending and freedom to use it with local issues in mind.
However, there are concerns that poorer parts of the country will lose out because this money was previously put in a pot and redistributed throughout the country and helped out areas where there are less businesses, and consequently, less receipts of business rates.
Growth review
A two-pronged growth review will also be published on March 23rd. It will be published in two parts. Firstly, it will contain details of an overhaul of the planning system. Secondly, a series of measures to ease regulatory burdens on businesses will be announced providing details of tax breaks available for businesses.
Adam Marshall, head of policy at the British Chamber of Commerce said: “We have had a lot of talk from the government about cutting red tape. It is time they walked the walk.”
How will the crisis in the Middle-East and Africa affect policy on oil and fuel?
The pressure on household budgets and family finances is growing. Higher food and energy prices, higher fuel prices and stagnating wages mean that George Osborne will appear very mean if he doesn’t reverse the announcement of higher fuel duty that was made by the previous Chancellor, Alistair Darling, last April.
However, the extra revenue that this would bring to the treasury is vital if the government is to meet its own targets for deficit reduction, so it is a tough dilemma for the Chancellor.
The ongoing troubles in oil-producing countries mean petrol prices are likely to continue to rise as oil prices go up to above $120 a barrel, so it is likely he will cancel the fuel duty rise. This will at least attract some positive headlines for a degree of compassion in what will undoubtedly be a tough budget that contains a lot of pain for families.
It is highly likely that a fair fuel stabiliser will be introduced that tracks oil prices and links current prices to fuel pump prices. There could be further measures designed to help haulage firms and other elements of the transport industry.
Highly likely budget measures
There will be a delay in the rise in fuel duty.
The personal allowance will be increased from £6470 to £7470. This will mean that most low or basic rate taxpayers will be £220 a year better off.
However, the rise in NI from 11 per cent to 12 per cent will mean that most people pay around £150 more a year in National Insurance.
Apart from that, we have some idea of the likely contents of this year’s budget because a number of draft clauses were published on December 9th 2010. A lot of these plans are to do with business tax and include changes to the taxation of foreign subsidiaries.
National Insurance Contribution Scheme (NICS) holidays for start-ups that were introduced last September could be expanded. The scheme currently exists outside London and the South-East and means employers do not have to pay employers NI of up to £5k on the first ten employees they hire in the first year of trading.
Councils could be allowed to borrow money to invest in roads and other infrastructure.
Likely budget measures
Beer will continue to be taxed at two per cent above inflation, which will add about another 10p to the cost of a pint. The cost of tobacco, cigarettes and cigars will probably rise above inflation too.
It is possible that Mr Osborne will provide details of a further increase in the personal allowance for 2012/13, perhaps as a sweetener to their coalition partners as the Liberal Democrats' aim is to increase it to £10,000.
There could be changes to the inheritance tax threshold as it was due to rise to £350,000 last year, but this was frozen.
Changes to capital gains tax are unlikely because last June's emergency budget saw the introduction of a mid-year rate change. However, the annual allowance of £10,100 has been frozen for the past two years, so an increase is possible.
The outside chances
Perhaps the Chancellor will listen to some of the advice the public has given him. The bank levy provided some relief to the public that the government was going to include the banks and bankers when David Cameron said: “We are all in this together”, back in April before the election.
Is it possible there could be a transaction tax imposed on the banks? Or perhaps, as per Labour’s previous policy, the bankers’ bonus tax could be re-introduced.
The Office of Tax Simplification has just finished a series of reports and the findings of some could form the basis of policy in this budget, or more likely in the next few years. One of the ideas, as mentioned earlier is to merge income tax and National Insurance, though this would need to be introduced over a number of years.
Another idea is to allow small businesses a fixed allowance for expenses which would reduce a businesses tax bill.
The outcome
Any spare money that the Chancellor can find will be used to reduce the impact of the spending cuts, lower the deficit or to prevent a further scheduled increase in fuel duty.
The impact of inflation and low growth means that consumer spending is likely to remain low in 2011, so economic growth will too. This means the government can’t afford to spend much as it will need to spend most of the available funds on reducing the deficit.
Whatever Mr Osborne manages to pull out of the hat it seems sure that the public will notice the cuts and impact on public service as we move deeper into the year.
Read more: A reminder - The Government Spending Review from October 2010
Use the Myfinances.co.uk's comparison tools to keep your bills low in 2011.
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