Budget backlash
Last Updated: 1:28am BST 13/10/2007
The new Chancellor's first moment in the limelight has unleashed a perfect storm of criticism, says Edmund Conway
This will go down as the year of the Budget backlash. In the spring, Gordon Brown portrayed his final Budget as a bold, tax-cutting package of measures; it was later exposed as an eventual tax grab. This week, Alistair Darling's first big set-piece had been intended as a retort to the resurgent Conservatives. Instead, it has been called a business-unfriendly, economically ominous electoral disaster.
But whereas Budget 2007 was only the precursor to the Brown honeymoon, Pre-Budget Report 2007 is the dismal end of the relationship. The Treasury had already been under serious scrutiny over its role in the Northern Rock crisis. Now, with business leaders, accountants and consumer groups deriding his Pre-Budget Report as a failure, its reputation (and, by extension, the reputation of Britain plc) is hanging in the balance.
The overarching accusation is that the Pre-Budget Report was a mish-mash of cynically snaffled policies from the Tory party conference. Even though Mr Darling had previously hinted strongly that inheritance tax might be re-examined, few guessed that he would go as far as to slot in a triple whammy of Tory plans, throwing in the flat-rate levy on non-domiciled foreign workers and the new duty on air flights for good measure.
According to analysts, there was very little of extra substance besides. But, ironically, it was the one of the Treasury's few home-grown policies that provoked the biggest roar of disapproval. Step forward Mr Darling's decision to scrap so-called taper relief on capital gains tax, and replace it with a flat rate of 18pc. Taper relief was one of Gordon Brown's big business initiatives, allowing businesses to pay less tax on the gains from their assets the longer they held onto them. The logic was to encourage investment in long-term assets, and many analysts think it has been the bedrock of Britain's enterprise economy over the past five years.
Its abolition was intended to affect private equity chiefs, who have been able to use the taper to cut their tax bills on their earnings (which are largely liable for capital gains tax rather than income tax) to a low 10pc.
However, it may also have the unintended consequence of driving some of the City's top entrepreneurs out of the UK. In an unusually critical letter, Richard Lambert, the director general of the CBI, claimed the changes could end up hitting the wider economy. He said: "By removing taper relief you have deployed an extremely blunt instrument that will deeply damage a much wider community and, in doing so, risk the medium-term health of our economy."
Another consequence is to raise the level of tax on share price gains. Perversely, those most affected will be the small long-term share investors and those who subscribe to employee share incentive schemes.
In fairness to Mr Darling, the move does amount to a big simplification of the tax system. Robert Chote, director of the Institute for Fiscal Studies, said this week that the Government had "achieved a welcome simplification of the tax system by removing one of the complications that it was responsible for introducing in the first place".
Even Mr Darling's attempt to give local councils the power to impose extra business rates on premises flopped, with high street chains warning the new tax would have to be passed on to shoppers.
Elsewhere, even when Mr Darling introduced an apparently uncontroversial and popular tax change, a cut in inheritance tax, it backfired. He announced he would double the effective amount married couples can leave to their children without paying inheritance tax to £600,000. However, many families have written wills to pass money directly to their children when they die, rather than giving to their spouse. This effectively enabled couples to claim £600,000 tax free under the existing system. Mr Darling's changes mean this is no longer necessary, and those families who made such changes are likely to want to change their wills again – at a cost.
On the flip side, the inheritance tax reform effectively cancels out the advantage families with accountants previously had in avoiding high inheritance tax bills. Because the measure is designed to include all widows and widowers it also extends this benefit to many others who had not made prior arrangements. As such, it helps tackle avoidance.
However, the lingering question is why a Labour government decided to implement it at all. Inheritance taxes have always been one of the bedrocks of Left-leaning economics.
Nor have the remaining policies gone down well. British Gas owner Centrica is leading a chorus of disapproval about Mr Darling's decision to scrap a type of green technology aimed at capturing carbon emissions. It has already invested millions in "pre-combustion" carbon capture technology at coal-fired power stations, only to find the Government has decided to subsidise only "post-combustion" carbon capture technology, despite indicating it would support both types of technology.
Meanwhile, pensions experts have warned that Mr Darling's plan to cap the value of the state second pension before restoring the earnings link to the basic pension will cost families a further £730m over the next three years.
To top it all off, there remain two big question marks over the imposition of a tax on non-domiciled foreign workers: will it drive talented employees out of the City, and will it really raise as much as the Treasury expects?
But perhaps the most disturbing element of the Pre-Budget Report for the City was its prognosis for the economy. Not only did Mr Darling cut his economic forecast for 2008 from a median of 2.75pc to 2.25pc, the text of the Pre-Budget Report revealed that Britain could actually be hit even harder. It warns that the longer the credit crunch persists, the worse the consequences for the economy. It also points out that Britain is almost uniquely vulnerable to market turmoil, because of its reliance on the City.
As a result of slower growth next year, Mr Darling admitted the Exchequer's tax revenues will be lower than expected. But rather than cut spending or raise taxes to compensate, he said he planned to borrow more, taking total borrowing next year to £38bn and meaning his budget will be in deficit for at least an extra year.
There is little Mr Darling can meaningfully do about the economy now except cross his fingers. But the Treasury is now quietly examining whether business's complaints about capital gains tax are justified. It is highly unusual for the government to withdraw a tax policy in the face of public disapproval – and no one is claiming this is as big a disaster as the poll tax. But if the business world's warnings are right, the Treasury should seriously reconsider its proposals fast. The country is already facing an economic storm. The last thing they need is for it to become a hurricane.
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Nu Liebor barstewards
Last Updated: 1:28am BST 13/10/2007
The new Chancellor's first moment in the limelight has unleashed a perfect storm of criticism, says Edmund Conway
This will go down as the year of the Budget backlash. In the spring, Gordon Brown portrayed his final Budget as a bold, tax-cutting package of measures; it was later exposed as an eventual tax grab. This week, Alistair Darling's first big set-piece had been intended as a retort to the resurgent Conservatives. Instead, it has been called a business-unfriendly, economically ominous electoral disaster.
But whereas Budget 2007 was only the precursor to the Brown honeymoon, Pre-Budget Report 2007 is the dismal end of the relationship. The Treasury had already been under serious scrutiny over its role in the Northern Rock crisis. Now, with business leaders, accountants and consumer groups deriding his Pre-Budget Report as a failure, its reputation (and, by extension, the reputation of Britain plc) is hanging in the balance.
The overarching accusation is that the Pre-Budget Report was a mish-mash of cynically snaffled policies from the Tory party conference. Even though Mr Darling had previously hinted strongly that inheritance tax might be re-examined, few guessed that he would go as far as to slot in a triple whammy of Tory plans, throwing in the flat-rate levy on non-domiciled foreign workers and the new duty on air flights for good measure.
According to analysts, there was very little of extra substance besides. But, ironically, it was the one of the Treasury's few home-grown policies that provoked the biggest roar of disapproval. Step forward Mr Darling's decision to scrap so-called taper relief on capital gains tax, and replace it with a flat rate of 18pc. Taper relief was one of Gordon Brown's big business initiatives, allowing businesses to pay less tax on the gains from their assets the longer they held onto them. The logic was to encourage investment in long-term assets, and many analysts think it has been the bedrock of Britain's enterprise economy over the past five years.
Its abolition was intended to affect private equity chiefs, who have been able to use the taper to cut their tax bills on their earnings (which are largely liable for capital gains tax rather than income tax) to a low 10pc.
However, it may also have the unintended consequence of driving some of the City's top entrepreneurs out of the UK. In an unusually critical letter, Richard Lambert, the director general of the CBI, claimed the changes could end up hitting the wider economy. He said: "By removing taper relief you have deployed an extremely blunt instrument that will deeply damage a much wider community and, in doing so, risk the medium-term health of our economy."
Another consequence is to raise the level of tax on share price gains. Perversely, those most affected will be the small long-term share investors and those who subscribe to employee share incentive schemes.
In fairness to Mr Darling, the move does amount to a big simplification of the tax system. Robert Chote, director of the Institute for Fiscal Studies, said this week that the Government had "achieved a welcome simplification of the tax system by removing one of the complications that it was responsible for introducing in the first place".
Even Mr Darling's attempt to give local councils the power to impose extra business rates on premises flopped, with high street chains warning the new tax would have to be passed on to shoppers.
Elsewhere, even when Mr Darling introduced an apparently uncontroversial and popular tax change, a cut in inheritance tax, it backfired. He announced he would double the effective amount married couples can leave to their children without paying inheritance tax to £600,000. However, many families have written wills to pass money directly to their children when they die, rather than giving to their spouse. This effectively enabled couples to claim £600,000 tax free under the existing system. Mr Darling's changes mean this is no longer necessary, and those families who made such changes are likely to want to change their wills again – at a cost.
On the flip side, the inheritance tax reform effectively cancels out the advantage families with accountants previously had in avoiding high inheritance tax bills. Because the measure is designed to include all widows and widowers it also extends this benefit to many others who had not made prior arrangements. As such, it helps tackle avoidance.
However, the lingering question is why a Labour government decided to implement it at all. Inheritance taxes have always been one of the bedrocks of Left-leaning economics.
Nor have the remaining policies gone down well. British Gas owner Centrica is leading a chorus of disapproval about Mr Darling's decision to scrap a type of green technology aimed at capturing carbon emissions. It has already invested millions in "pre-combustion" carbon capture technology at coal-fired power stations, only to find the Government has decided to subsidise only "post-combustion" carbon capture technology, despite indicating it would support both types of technology.
Meanwhile, pensions experts have warned that Mr Darling's plan to cap the value of the state second pension before restoring the earnings link to the basic pension will cost families a further £730m over the next three years.
To top it all off, there remain two big question marks over the imposition of a tax on non-domiciled foreign workers: will it drive talented employees out of the City, and will it really raise as much as the Treasury expects?
But perhaps the most disturbing element of the Pre-Budget Report for the City was its prognosis for the economy. Not only did Mr Darling cut his economic forecast for 2008 from a median of 2.75pc to 2.25pc, the text of the Pre-Budget Report revealed that Britain could actually be hit even harder. It warns that the longer the credit crunch persists, the worse the consequences for the economy. It also points out that Britain is almost uniquely vulnerable to market turmoil, because of its reliance on the City.
As a result of slower growth next year, Mr Darling admitted the Exchequer's tax revenues will be lower than expected. But rather than cut spending or raise taxes to compensate, he said he planned to borrow more, taking total borrowing next year to £38bn and meaning his budget will be in deficit for at least an extra year.
There is little Mr Darling can meaningfully do about the economy now except cross his fingers. But the Treasury is now quietly examining whether business's complaints about capital gains tax are justified. It is highly unusual for the government to withdraw a tax policy in the face of public disapproval – and no one is claiming this is as big a disaster as the poll tax. But if the business world's warnings are right, the Treasury should seriously reconsider its proposals fast. The country is already facing an economic storm. The last thing they need is for it to become a hurricane.
--------
Nu Liebor barstewards
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