So the Chancellor stuck to Plan A, eliminating the deficit by 2015, coming as little surprise to us anoraks. With fiscal policy having been set for the course of Parliament during last year’s CSR and emergency budget, there wasn’t a whole lot of room for manoeuvre in this year’s budget. From the start, his speech was going to be far from the 4hrs 45mins speech Gladstone gave to the house in 1853. But it presented our hard-pressed Chancellor with the opportunity to engage in a media relations exercise by announcing a series of positive measures that would dominate headlines the next day.
What caught the headlines?
Most newspapers went with the cut of 1p in fuel duty, a deferral of 1p plus inflation duty rise scheduled for April and a promise that fuel taxes would not rise so long as the price of oil did not fall below $75 a barrel. Although a surprise and welcome relief to motorists, it pales in comparison to the rise in NI contributions and cuts in departmental and local council grants set to kick in next month and newly announced measures to link direct tax rates to the lower Consumer Price Index.
The cut in corporation tax from 28% to 23%, set to be the lowest in the G7, over the course of the parliament was a positive pro-business headline. Arguably because the bank levy had been adjusted upwards to neutralise any such tax cut for the banks and the decision to bring down the 50% tax rate had been put on the back burner. A cool calculation designed to head off criticism of the Tories as a party of the rich.
The impending return of WPP was a coup for the coalition; the marketing giant has reportedly been enticed back from Ireland with the prospect of a lower 5.75% tax on overseas earnings. Although rumours are circulating within communications consultancy circles that the move was a cynical ploy to secure a key communications contract with the government.
It would be unfair to brand the entire budget as an exercise in PR, it does contain a seemingly impressive list of pro-growth measures that have been developed in consultation with key business groups and think tanks. Aside from the corporation tax and reform of foreign earnings taxation, the budget centred on a number of targeted measures to nurture the growth of SMEs, some of which were flagged up in the previous blog entry. The most prominent are:
- A three-year memorandum exempting businesses employing fewer than 10 staff from new domestic regulation.
- The creation of 21 Enterprise Zones in potentially high-growth areas which offer high-speed broadband, up to 100% discount on rates (capped at £275k over 5 yrs) and relaxed planning rules.
- Expansion in the Enterprise Investment Scheme, increasing the qualifying threshold to companies with 250 employees and assets of up to £15m. To entice venture capital, the level of investment permitted under the EIS has been raised from £2m to £10m with a rise in tax relief from 20% to 30%.
- A rise in R&D tax credits for small businesses to 200% from April and 225% next year.
Is this a budget for growth?
Previous budgets have been presented amidst much fanfare and hubristic claims so this month’s one will be in good company. Putting aside the questionability as to how far governments of advanced economies can influence growth trajectories over the long run, in the short run the proof will be in the pudding; at this stage it would be premature to make such claims on the budget’s efficacy.
For much will depend upon the demand side too; if the private sector has little faith in the economy then businesses will hoard cash, pay down debt or pay out dividends from the proceeds of the tax cuts and lower regulatory compliance costs instead. As has been the case over the past couple of years. So it will really be a matter of hoping consumer confidence picks up now.