A Crucial 24hours in Business

Budget Update from John Birchall

For the Labour government and its chances of being re-elected the next 24 hours may well be crucial. They have delivered their last budget before the election, due before 6th June and with opinion polls showing the two main parties to be close (http://www.mirror.co.uk/) the stakes are high. How will the financial markets react to the Budget? If the £ steadies then the City likes it, if it falls Mr Darling’s opponents will hit him hard.

Mr Darling, The Chancellor or Minister of Finance has made his choices and in what was a thinly disguised political statement.
The main themes are:
• We have got you out of the deepest recession in living memory
• The pain has been less than it could have been
• The other lot would have made the wrong decision every time

Let’s have a look at some of the details of the speech:

• £2.5bn support for small business to boost skills and innovation – this will play well in traditional Labour heartland and also influence some swing voters and those still undecided.

There’s more to come....
• One year business rate cut from October to help 500,000 companies
• Investment allowance for small firms doubled to £100,000
• Doubling relief on capital gains tax for entrepreneurs
• No change to capital gains tax rates
• £385m to maintain road network
All of these will be seen as ‘business friendly’ and will be sold as helping us move safely out of the recession – note less risk – a major theme of the forthcoming General Election.

• One-off bank bonus tax has raised £2bn, double the amount forecast – this will ease the worries of some who think those who helped get us into the mess are now making millions as we move out of it, and the bail-out has been largely financed by the tax payer.
• Backs tax on bank transactions but on global basis – this is a deliberate dig at the Tories, who favour ‘going alone’ on this and some say risk being left alone as bankers move to those countries who have not levied the tax.
• A million extra people guaranteed basic bank account
• RBS and Lloyds Bank Group to provide £94bn in small business loans – this will ease credit problems in SME’s and be seen as a gentle reminder to banks that we own quite a large chunk of them.
• New service to adjudicate credit disputes – look more like froth than a real policy – but let’s wait and see.
• Tax allowances for those earning over £100,000 gradually removed – again a deliberate tilt at the traditional Labour voter, as this tax concerns about 2% of workers
• No changes to VAT or income tax planned – no expert though he would change this
• Inheritance tax threshold frozen for four years – this might just bounce back against him as the Tories first gained poll leads by announcing scrapping it on properties above £1 million – about 1% of all transactions.
• Clampdown on tax avoidance to raise £500m – this is part of halving public sector debt in 4 years – which is designed to ease the fears of the financial markets
• New tax agreements with Belize, Grenada and Dominica – this might interest Lord Ashcroft!
• On track to achieve £11bn efficiency savings target
• Reform of housing benefit to save £250m
• 15,000 civil servants to be relocated outside London
• All of the above are also part of the cuts promised in public sector debt

Now for the real crunch!!

• Economy contracted 6% during the recession
• Predicted growth of 1-1.25% in 2010, in line with forecasts
• Downgrades growth forecast for 2011 to 3-3.5%
• All of these are in line with most forecasts but it may also allow him at a future point (Will there be one?) to be ‘generous’ if the economy grows faster than predicted.
• Borrowing this year forecast to be £167bn - £11bn lower than expected
• Borrowing to fall from £163bn in 2010-11 to £74bn by 2014-15
• These figures are the real issues – the structural deficit is forecast to be 2.5% of GDP by 2014 and that is within the EMU Convergence Criteria and would certainly keep sterling stable. Gross debt by the public sector as a percentage of GDP will fall to 5.2% by 2014. BOTH of these represent a cut by ONE HALF of the borrowing currently being registered – what he promised to do – and he will announce further cuts in public spending at the Public Sector Review in November – if he is still Chancellor.

Clever stuff, yes some smoke and mirrors but it will be interesting to see (a) How Mr Cameron argues too hard against these without leaving himself open to charges of being too tough on a patient just out of intensive care and (b) how the City will view the long term control of public finances.