What I'd like to see in the budget

by Ed Bowsher on 22 March 2010  |  6 comments
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We'll hear the last budget before the election on Wednesday. I thought I'd give the Chancellor a few last minute tips on what should be in his red box.

The Chancellor has had a bit of good luck. Revenue has been higher than expected in the last few months and the government’s deficit for the year will no longer be as high as £178bn. I’ve read different estimates of how much lower the deficit might be. Anything between £5bn and £20bn.  

Given the sluggish state of the economy, it’s very tempting to use some of that money to give a further fiscal stimulus. But, sadly, the Chancellor must resist that temptation. The financial markets are very jumpy about the size of the government’s debt; if a further stimulus was announced I fear that we’d quickly see a jump in long-term interest rates.  

Forecasts 

At the moment, the government is forecasting economic growth of 1 to 1.5% in the next financial year. That’s a reasonable forecast although I wouldn’t be surprised if growth was lower than 1% in the end. 

My real beef is with the forecast for the year after that – 2011-12. Currently Alistair Darling is forecasting growth between 3.25 and 3.75 per cent for 2011-12. I think this is very optimistic. 2011 is the time when tax rises and government spending cuts are most likely to kick in and they will be a major constraint on economic growth. I’m also pretty sure that the banks will still be fragile – not enough lending will be another constraint on economic growth.  

Of course, if the Chancellor cuts his growth forecast, he’ll have to admit that tax revenues will be lower than forecast in 2011-12, and that in turn, will further damage the credibility of his claim that he can halve the deficit in four years. So the growth forecast will probably stay unchanged. 

Pensions 

I really dislike the government’s plan to reduce tax relief on pension contributions for people who earn more than £150,000 a year.  Supporters of the measure argue that people earning that much are rich enough to save on their own for their retirement, they don’t need any help from the government.  

But I dislike the measure because it makes things so complicated. And a complicated system won’t encourage people to save. If the Chancellor feels he must save money on pensions tax relief, a better plan would be to lower the annual limit on pensions savings. In other words, if you paid more than £50,000 into a pension fund in one year, you’d only receive tax relief on the first £50,000. 

Tax rises 

Tax rises are pretty much inevitable over the next three years. I don’t think we can realistically just rely on spending cuts.  

I think for the most part we should wait until 2011 before we launch a full-scale assault on the deficit. The economy is still fragile. But it might be worth introducing one token tax rise. That could be a signal to the markets that the government takes the deficit seriously.  

My choice would be an increase on VAT for domestic fuel. Currently gas and electricity are only taxed at 5 per cent. Pushing up the VAT rate to 17.5 per cent would raise an extra £3bn a year, according to BDO, and would also help to reduce carbon emissions. Admittedly, some OAPs would be badly hit by this rise, so I’d also increase the winter fuel allowance by more than inflation. That would reduce the total tax gain by something like £500 million, but a 2.5bn boost to the government’s coffers would still be very welcome. 

The chances of the Chancellor introducing such a measure six weeks before the election are close to zero. 

The real budget 

Alistair Darling will be presenting his budget at 12:30 on Wednesday. I’ll be watching and I hope to blog again on Wednesday.