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Top 10 Budget predictions

Lee Hopley June 18, 2010 14:41

Ahead of next week’s crucial Budget, we try to indentify some of the key issues which are most likely to affect our members.

1

VAT – An increase, possibly staggered, in the VAT rate.

This is needed to rebalance the economy and raise revenues. If the Budget does not proceed with at least a 1% increase we risk uncertainty about more tax rises further out.

2

Capital allowances – The coalition has talked about the simplification of reliefs and allowances to fund a cut in corporation tax. This could include a cut in the capital allowances rate and abolition of the Annual Investment allowance.

Scrapping the AIA and cutting the capital allowances rate will undermine rather than reinforce economic rebalancing. The tax system more efficient in recognising the short lives of modern machinery. The Chancellor could do this by extending short-life asset election.

3

Corporation tax – a 3p reduction in the headline rate of corporation tax, staged over the life of the parliament.

Reducing the corporation tax rate over the parliament should be a priority. Given the tough decisions on how to reduce the deficit and generate growth, there is no need to rush ahead, especially if an immediate cut was financed by cuts to capital allowances.

4

National Insurance Contributions (NICs) – the coalition agreement pledged to reverse the increase planned for April 2011, but change the thresholds.

With public sector job losses looming businesses need a complete package of corporate tax reform which will support investment and job creation – NICs is part of this. The rise would have had to be absorbed by squeezed margins, but threshold changes shouldn’t undo progress in aligning NICs and income tax.

5

Capital Gains Tax – The coalition document states that non-business capital gains will be taxed at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities.

Given that previous changes to CGT have led to unintended consequences reform is needed, but should be consulted on. Closing the gap between income and CGT rates is a good starting point, but reform should also provide incentives to invest in productive businesses for the long-term.

6

2015 borrowing target – The Conservatives have previously stated that they would eliminate the ‘bulk of the structural deficit by the end of the next parliament’. The budget is likely to set an end of term target for borrowing and debt.

The government should aim to get borrowing below 3% by the end of the parliament. A clearly stated ambition is part of a credible deficit reduction plan, but the OBR must judge this to be achievable with planned measures.

7

5 year tax reform plan – The Conservatives have previously outlined their intention to put forward a longer term plan for business taxes and reform. The Budget will provide more detail on the process and areas of reform.

The UK’s tax system needs reform to keep it internationally competitive. A five-year agenda for reform as a useful first step towards improving competitiveness and predictability after the drift in tax policy and strategy during the past few years and stop the legislative churn that has added to complexity.

8

Tax/Spend balance – The stated aim has been for an 80/20 split between spending cuts and tax rises to reduce the deficit. With up to date fiscal forecasts the Chancellor may confirm or amend this approach in the Budget statement.

For the Chancellor to stick to this 80/20 split, it could mean significant cuts to unprotected, but important areas of investment in future sources of growth and competitiveness. A 60/40 balance is more realistic if fiscal consolidation is to align with rebalancing.

9

DELs – publication of government department spending totals is possible, but unlikely. Some commitments have been made, but the remainder is likely to depend on the outcome of the Spending Review process.

It is unlikely that the Budget will go this far, but we’ll be keeping a close eye on capital budgets.

10

Environmental taxation – the coalition agreement states that the government wants to raise a higher proportion of revenue from environmental taxes. We could see immediate reform or consultation of air passenger duty, the climate change levy and a carbon tax.

The must be consultation about new or reformed environment taxation. In principle, these should not be an additional cost on business; the competitiveness of energy intensive firms should be protected and revenues should support clean technologies.

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