Three Options Shaping Up for Osborne …
Scot-Buzz editor Bill Jamieson reflects on the Chancellor's Autumn Statement...
Lower taxes on SMEs? A tax raid on the energy giants? Cuts in higher rate tax relief on pension contributions? With chancellor George Osborne’s Autumn Statement due on December 5 - a fortnight on Thursday – these are the emerging front runners.
This year’s pre-Budget scene-setter is of key importance for two reasons. First, it will provide an update on progress on cutting the budget deficit. Are we on course for meeting this year’s deficit target – or might there be a sizeable undershoot?
The second is for any signals he will give on tax cuts next year when he will present the last effective budget before the 2015 general election. If he wants to give credible help to business, to sustain the recovery and to address the growing imbalance between London and the rest of the UK, this is when he needs to act.
And there is a political imperative to do so, given that the evidence of recovery thus far has done little to lift Conservative Party fortunes.
What scope does he have? Figures due this Thursday should show a continuing improvement compared to a year earlier, reflecting the pick-up in the economy which has boosted tax receipts. Market expectations are for a Public Sector Net Borrowing Requirement (PSNBR) of £7.2 billion in October, down from £8.3 billion in October 2012.
Osborne aimed to have the PSNBR to come in at £120 billion in 2013/14. Over the first six months of the 2013/14 financial year (April-September), the underlying PSNBR came in at £56.7 billion, down 9.4 per cent from £62.6 billion in the same period previously.
If this is sustained over the full financial year, Global Insight economist Howard Archer forecasts the underlying PSNBR will come in around £105 billion – well below the chancellor’s target of £120 billion. And on top of this, the outlook for 2014 is looking materially better than previous forecasts, so Osborne should be able to present a credibly encouraging picture.
But business and households alike have to be realistic. We are still borrowing far too much. Total public sector debt continues to climb. Announcements on December 5 are thus likely to be modest, if only to save the political impact for next spring.
Nevertheless, there are several measures he could signal…
Top of the hit list of Martin Bell, tax partner at business advisory and accountancy group BDO in Scotland, is an employers’ National Insurance rebate or holiday. Recent surveys have indicated that a reduction in employers’ national insurance is the number one recommendation from businesses to encourage them to take on new workers.
As George Kerevan explains in his timely column for Scot-Buzz today, the chancellor is already on the case. The March budget announced the removal of the first £2,000 off employers' NI contributions. Osborne called this move “the largest tax cut in the budget”. It should, George explains, exempt some 450,000 SMEs from paying any employer NI at all.
“Credit where credit is due”, George notes, yet “this reform has had scant media attention.” One reason may be that the NI allowance does not come into effect till next year. The Autumn Statement may thus contain a forceful reminder of what’s in the pipeline. And let’s hope it’s not as complicated as previous NI relief measures which severely dampened their effect.
Also high on BDO’s list of possibles are higher taxes for the energy industry. A one-off windfall tax on the energy giants would be popular with voters. It would help alleviate the ‘cost of living crisis’ which has prevented households from feeling any benefits from the recovery. And it should combat Labour’s call for a temporary price freeze on energy bills. In revenue terms such a tax raid is unlikely to be significant, but the political benefits considerable.
If Osborne wishes to raise revenue, BDO points to the removal of higher rate income tax relief for pension contributions. It has been much speculated on in the past, but the sharp improvement in asset prices (and pension fund assets) should help cool the political backlash.
Other runners and riders on the BDO list include tax relief for expenditure on buildings used for trading purposes, merger of approved share option schemes and removal of the 5% condition to access Entrepreneur’s Relief, enabling more employees to invest smaller proportionate amounts.
Bell also speculates on a rise in the standard rate of VAT. It’s a highly effective way of raising revenue (£4. 75 billion for each one per cent rise, according to HMRC). Many EU countries have higher standard VAT rates than the UK. And it would address concerns about an unbalanced, consumption-driven recovery.
But it would add to households’ financial squeeze and be very unpopular with SMEs.
Please, Chancellor, forget it.
