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On Wednesday 21 March 2007, Gordon Brown the UK Chancellor of the Exchequer presented his 2007 Budget. This was potentially Mr Brown's last budget and if so he has gone out with something of a bang, with some significant income and corporation tax changes.
The UK economy was less of a centrepiece than it has been in previous Budget speeches but naturally claimed a lot of attention. Growth next year is still projected to be in the Treasury's 2.5-3% range. Inflation is set to fall to around 2% and stay there. Borrowings do seem to be improving, with estimates of £35bn for the current year (against £36bn expected in the Pre-Budget Report) and forecasts of reducing amounts to £24bn in five years' time. Part of this improvement is undoubtedly down to tighter spending and efficiency savings, though more money has been found for security and defence.
The Golden Rule - only borrowing to invest over the economic cycle - was, as expected, formally announced to have been met, with an £11bn surplus. As for the borrowings rule, that is still on track but a little tighter. But it needs emphasising that there is no crisis: the UK economy is still in pretty good shape, even though our neighbours and competitors are looking somewhat healthier than in recent years.
Considerable attention was focused on business measures. The headline cuts in the main corporation tax rate to 28% from April 2008 are undoubtedly in the right direction to help boost the international competitiveness of the UK's tax system. However, this is not the 'give away' it might seem; the recast of the capital allowances system - to a standard 20% plant & machinery allowance, phasing out of the industrial buildings allowance, slightly balanced by the 10% long life asset rate - will be revenue raising. The moves on smaller companies is also interesting, with the counter-intuitive increase in small companies rate in stages to 22% (to parallel the existing basic income tax rate reducing the self-employed/incorporated differential), balanced by an increase in R&D allowance and the new £50,000 'investment allowance'. Overall, the package is revenue neutral, though an extra £1bn comes in from 'rationalisation' of the empty business rates relief. We also had the expected signal of major improvements in HM Revenue & Customs dealings with big business, with the taking forward of the Varney Report proposals. This all does hold out the promise of a more business-friendly tax system that should help the UK's international competitive position.
The changes to income tax were significant as well, with the abolition of the 10% tax rate for non-savings income and a considerable increase of the starting level for the 40% tax rate. But that was capped by the dramatic announcement at the end of the speech, cutting the basic rate from 22% to 20% from 2008. The elderly also receive a significant increase in the personal allowance for the 65+ from 2008. This will be paid for by the abolition of the 10% rate - raising £7bn - and the alignment of national insurance contributions (NICs) at the higher rate income tax threshold - implying that for middle/higher incomes there will be 11% NICs rather than 1% on a significant extra tranche on income, though this is to be phased in.
There was the expected greenish tinge to the Budget with increases to vehicle excise duty at the top end and the prospect of lobbying Europe to cut the VAT rate on environmentally-friendly household purchases from 17.5% to the 5% lower rate. However, the announcements lacked the major policy framework that many would have liked to see.
The capital gains tax allowance rises to £9,200 as expected; the inheritance tax threshold increases more quickly, to £350,000 in 2010. Cash ISA amounts go up to £3,600 next year. However, child benefit and working tax credits are to be boosted. The 'sin tax' increases were inflationary, with 11p on cigarettes, 7p on sparkling wine, 5p on wine, 1p on a pint of beer (and, this year, cider) but the usual freezing of duty on spirits. Duty on petrol and diesel is due to increase by 2p a litre, but not until October this year.
There were no announcements on residence or domicile.
Overall, the company tax and income tax proposals will likely have a minimal net impact on the UK Government's revenues on an overall basis. But, inevitably, there will be winners and losers - manufacturing industry and middle income individuals will have to look carefully at how this package pans out.
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