Political and regulatory news
Issue 5 - 14 December 09
It's the economy, stupid ...
The AIC summarises the main points from the Pre-Budget Report.
The Chancellor’s Pre-Budget Report on 9 December was made under difficult economic circumstances and intense scrutiny about plans for future government spending. The likely impact on the City of his tax and deficit reduction plans was, as ever, an important political agenda.
In his report, Alistair Darling raised borrowing forecasts for the current year to £178 billion, with an intention to gradually reduce the level of government borrowing to £82 billion by 2014/15. He said “To consolidate too soon, too quickly or too indiscriminately, as some have proposed, risks delaying the recovery and threatening a longer recession”. The deliverability of this commitment to reduce government borrowing will depend upon the rate of economic recovery and how successfully the Chancellor can reign in spending. The government forecasts growth for next year to be between 1% and 1.5%, increasing to 3.5% in 2011 and 2012. Despite the announcement of a cut in spending levels over the medium term, the rate of public expenditure is actually expected to rise by £31 billion in 2010. Expenditure for health was ring-fenced and education actually saw a slight rise. How the ambitious cuts promised by the Chancellor, and wanted by the markets, will be delivered remained unspecified.
The Pre-Budget Report confirmed that enterprise and support for small businesses remains part of the Government’s agenda. That this featured in the rhetoric of the statement is perhaps unsurprising given the role that the Treasury hopes growth will play in helping restore the public finances. Alistair Darling said “The steps I have announced today are aimed at securing recovery, reducing borrowing, and through targeted investment, providing a springboard for long-term growth”. His caution against withdrawing financial support for the economy too soon sought to create a distinction between his approach and Conservative’s calls for earlier and deeper measures to reduce the budget deficit as quickly as possible. The CBI has also called for the public finances to be brought under control swiftly to position the economy for recovery. Clearly a recovery in the UK’s economic position is important for many investment companies. However, the focus on supporting business growth may be most significant for Venture Capital Trusts, and provides a platform to discuss the position of the sector – and the need for continued government support – in the run up to the next election.
The Pre-Budget Report gained its biggest headlines for its measures which increased taxes, in particular on banking bonuses and National Insurance. These issues were, unsurprisingly, highly political. The decision to impose a short term tax of 50% on UK banks paying bonuses over £25,000 is expected to raise only some £500 million. It will therefore have a negligible effect on the overall fiscal position of the Government, but it was a reaction to broader public sentiment about the impact that the banking crisis has had on the broader economy. The further 0.5% increase in National Insurance was seized on by critics of the Chancellor as an indication that future increases in tax would in fact fall upon the majority of the population, not the rich few. Personal tax remains a highly emotive and politically charged agenda and will be critical in forming attitudes in advance of the general election. Among the main political benefactors of the Pre-Budget Report were pensioners, with an increase of 2.5% in the basic rate pension, and low paid earners, as rises in national insurance contributions will not affect individuals earning less than £20,000.
If, as many expect, the next General Election is held in May, there will be one more chance for the Chancellor to set out further plans on tax, spending and the impact that this will have on the deficit. Given the hostile reception in parts of the press to the Pre-Budget Statement, some are speculating that the election may be brought forward to avoid the need for such a discussion of the government’s plans at such a sensitive time. Whether this speculation is correct, issues relating to the macro economic environment and fiscal concerns are likely to generate intense political debate over the next 12 months, including the general election and beyond.
To view the full Pre-Budget Report, click here.
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