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Budget
Budget Predictions
With the Budget looming on St Patrick's Day - 17th March - we take a look at what the experts are predicting Mr Brown is going to announce. Will he remain his usual prudent self?
Some commentators are suggesting Mr Brown needs to raise taxes by around £10-15bn a year in order to be certain of making his targets. The Institue for Fiscal studies says "further increases in tax may be needed to maintain the health of the public finances unless there are substantial cutbacks in government spending. The Chancellor does not seem to accept the argument that he may need to raise revenue."
However, says John Whiting, tax partner of PriceWaterhouse, it is likely that he will stick to his guns, say the economy is safely on course and avoid any hint of rises for the present.
National Insurance
£15bn is about twice the amount raised by the National Insurance surcharge on employers and employees - a considerable amount. So how is it to be done?
Whiting thinks that if he does decide to signal major tax rises, the choice will be between National Insurance Contributions (NICs) and VAT (income tax being ruled out by Manifesto commitments). In view of past performance, NICs would be the more likely target.
The Institute for Fiscal studies agrees that NI is a likely target. It suggests that Mr Brown might "freeze the income tax personal allowance and NI earnings threshold, or - more dramatically - to increase National Insurance contributions by raising the employee rate above the upper earnings limit (UEL) or moving the UEL closer to the basic-rate income tax limit."
VAT
An alternative is that Mr Brown takes the VAT route suggested by the International Monetary Fund and others.
However he has already drawn a line in the sand in his dealings with European Finance Ministers making clear that he refuses to extend the VAT man's reach to items not currently covered by the tax such as children's clothes or newspapers.
Housing
That leaves housing, currently the subject of extensive study inside and outside the Treasury. Many possibilities have been considered including the idea of imposing VAT on new homes. This would raise £4.5bn but might deter new house building at a time when there are severe supply problems.
The IFS agrees. "Raising current housing taxes or changing their structure may provide an enticing way for the government to raise revenue in the future, but justifying it on the basis that housing is 'undertaxed' - as stated in the Euro supporting study - seems flawed. Looking at housing relative to other investment goods and looking at the UK in an international perspective, housing does not appear to be lightly taxed. It is only when comparing housing with other consumption goods that the argument holds significant weight, but even then there may be particular reasons for taxing housing more lightly. If there were moves to increase or reform housing taxation, there are various options for doing so, each with particular problems and merits."
Given the lack of consultation on what would clearly be a major policy reform, it seems unlikely that any major change to housing taxes will be announced in Budget 2004.
There may be concerns that consultation on changing housing taxes could cause short-term fluctuations in the market if people anticipate that taxes are about to rise. Nevertheless, given current concerns about the state of the housing market and ways in which it can be stabilised, as well as the revenue that extra housing taxation would raise, it is possible that housing will become an increasingly attractive area for future policy changes.
There has also been some speculation that stamp duty on property could rise - but it may be that the chancellor decides to wait and tackle the whole property area in one go.
If you like a flutter
John Whiting of PriceWaterhouse Coopers has set some odds on the likelihood of other measures in the Budget - have a look and see whether you agree.
1. Significant tax rises i.e. enough to raise around £10-15 billion - 8-1
2. National insurance ceiling for 2005/06 raised - 3-1
3. Improved capital allowances for smaller businesses to encourage enterprise - 1-2
4. New tax on dividends from some small companies - Evens
5. Inheritance tax threshold increased by more than 10% - 10-1
6. Stamp duty rises on house purchase - 6-1
7. Inflationary increases (or less) on alcohol, tobacco and petrol - 2-1
8. Transfer pricing and thin capitalisation rules delayed - 3-1
9. Pensions tax reforms go ahead with the £1.4m 'pot limit' - Evens
10. Cash ISA amounts improved - 15-1
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