Pre-Budget Report 2008: an overview

24 November 2008

The Chancellor, Alistair Darling introduced his pre-Budget Report to the Commons against what he described as a “background of uncertainty not seen for generations” and at a time of “extraordinary” challenge for the global economy.

He went on to say that he wished to take steps to “protect and support businesses and people now” while putting public finances on “the right path for the future”.

The government has made little secret that it sees a package of fiscal measures as essential to reversing the slowdown in the economy.

So it was no surprise that Mr Darling announced £20 billion of tax cuts and funding measures – 1 per cent of GDP – to stimulate economic and business activity.

Before getting into the detail of his plans, Mr Darling conceded that recession is on its way. The economy would expand by just 0.75 per cent this year and would shrink by 1 per cent next year. Only in 2010 would growth resume, the Chancellor said, predicting an expansion of between 1.5 per cent and 2 per cent.

With the government committed to borrow in order to fund both tax cuts and to boost public expenditure, the Chancellor said that the budget deficit would climb to £78 billion this year and £118 billion next (equivalent to 8 per cent GDP), scaling back to £54 billion by 2014.

The UK would only be borrowing to invest again by 2015/16.

With public spending one of the twin pillars of the government’s approach, some £3 billion of capital expenditure scheduled for 2010/11 is to be brought forward to this year; the funds are to go on investment in roads, schools, social housing and new energy measures.

The second pillar is the much-heralded series of tax cuts, the intention of which is to encourage consumers to loosen household purse strings. In the most eye-catching, VAT is to be cut temporarily as from 1 December by 2.5 per cent to 15 per cent.

The increase in the income tax personal allowance of £120 a year for basic rate taxpayers is to be made permanent and to be raised to £145 in April.

Small businesses also received some welcome news. The planned increase in the small companies’ rate of corporation tax, from 21 per cent to 22 per cent, has been put back a year and will stay at 21 per cent during 2009/10.

The threshold at which an empty property becomes liable for business rates is increasing temporarily. For the financial year 2009/10, empty premises with a rateable value of less than £15,000 will be exempt from rates.

Businesses that find themselves struggling to pay VAT, corporation tax, PAYE, income tax and NICs will be able to make use of a new HM Revenue and Customs service. The Business Payment Support Service means that firms facing temporary financial problems can negotiate spreading the payment of tax bills over a period of time they can afford.

The Chancellor also proposed a package of measures to improve the levels of funding available to cash-starved firms.

Early next year, the government is to set up a Small Business Finance Scheme, a temporary programme that will guarantee £1 billion of public money to encourage banks to lend to businesses. Another £1 billion will go to provide smaller exporters with easier access to short-term working capital.

Just as the Chancellor’s tax cuts came as no surprise, so too his announcement of plans to raise taxes in the future to help reduce extra levels of government borrowing were not unexpected, not least in the reassurance they offer the City that he is still in command of public finances.

As from April 2011, Class 1 and Class 4 NICs are to be increased by 0.5 per cent.

Also as from April 2011, taxpayers earning more than £150,000 a year will pay an increased tax rate of 45 per cent.