BUDGET: CHANCELLOR’S TIGHT-ROPE : Wednesday’s Budget should see the Prime Minister-in-waiting appease the Labour left and clamp down on “taper relief
GORDON Brown is expected to infuriate big business and private equity firms with his tenth budget as chancellor this Wednesday.
He is expected to clamp down on the “taper relief” by which businesses, business owners and venture capitalists are able to reduce the capital gains tax paid on the sale of business assets. The cost to the Treasury of this relief — first introduced by Brown in 1998 — has escalated from £550m in 2002-03 to £4.5bn in 2005-06.
The Chancellor will also further target the myriad of complex tax avoidance schemes by which wealthy individuals and corporations routinely reduce their tax burdens. These are also costing the Treasury billions in tax — more than taper relief — but are regarded as legitimate by organisations including the CBI and the large accountancy firms.
The “big four” accountancy firms — Deloitte, Ernst & Young, KPMG and PwC — believe it is unfair that Brown is demanding the “tax planning” schemes by which they save billions for their clients must now be disclosed to the Treasury in advance of their use.
On the other side of the coin Brown is expected to offer significant benefits to families with children, including top-up payments of £250 under the Child Trust Fund for all children at the age of seven, with children from low income families receiving £500.
Overall the chancellor’s goal is to use his Budget as part of his campaign to win popular support ahead of his “coronation” as successor to Tony Blair in advance of the next general election.
Jeremy Batstone, research director at stockbrokers Charles Stanley, said: “Bear in mind where we are in the political cycle. Gordon Brown is likely to have his eye firmly fixed on that prize. Given this could be his last Budget speech, one might expect him to err on the side of caution; a tax-raising Budget now, to provide leeway for munificence before his elevation to the premiership.”
Richard Laverick, Edinburgh-based head of tax at accountants Ernst & Young, said: “If the chancellor is to maintain his reputation for sound economic policy, he will push on with his revenue raising plans so as to leave no one in any doubt as to his skills both as a Chancellor and as a strong politician. The campaign against anti-avoidance will continue apace with businesses in the firing line.”
Private equity investors are concerned that taper relief, which has become a key part of their model, may be removed. “Brown should bear in mind that anything he does to bugger up the private equity industry will harm the wider economy, “ said Jonny Maxwell, chief executive of Standard Life Investments Private Equity. “Private equity funds will just move offshore.”
There is also concern that Brown’s crusade against tax avoidance, which he is expected to intensify with Wednesday’s speech, will serve to drive head offices elsewhere than the UK.
Russell Hills, a tax partner at KPMG, said: “A major concern is that in an attempt to crack down on the minority, Her Majesty’s Revenue and Customs is imposing a disproportionate compliance burden on the compliant taxpayer and adviser.”
Iain McMillan, director of CBI Scotland, said: “Gordon Brown needs to do what is good for the country, and what is good for business is good for the country. He shouldn’t be playing up to interest groups within his party.”
“The Chancellor is increasingly blurring the distinction between tax evasion and tax avoidance. Tax evasion is illegal and the CBI will have nothing to do with such criminal behaviour. But tax avoidance — arranging one’s affairs within existing legislation — is perfectly legitimate. Brown is going too far and may inadvertently encourage businesses to move overseas.”
Brown is expected to seek to raise more in tax revenue than was predicted because the government’s public sector efficiency drive is unlikely to yield as much as the Treasury had anticipated.
Many economists suspect hat despite the unusual rosiness of January’s public finance figures, Brown’s books are in a worse state than thought, as the figures were propped up by one-off tax payments by oil companies.
A report from forecasting group the Ernst & Young Item Club says that, although Brown may be able to muddle his way through the Treasury’s new 12-year cycle, the outlook for the UK economy is shaky.
Rising tax and energy bills are sapping spending power, raising doubts over Brown’s forecasts for economic growth. Also, interest rates are on the rise around the world — notably in the US, eurozone and Japan — which means the era when cheap money propped up otherwise weak global economies is coming to an end.
James Carrick, ABN Amro’s chief UK economist, has already warned of possible recession later this year. “Weaker consumer spending will trigger a chain reaction of higher unemployment and tumbling house prices, “ he said.
Professor Peter Spencer, economic adviser to the EY Item Club, said: “The Treasury can’t have it both ways. They can’t expect us to pay higher tax, fuel and utility bills and keep the economy afloat by shopping in the High Street.”
However Spencer says tax from North Sea oil, Brown’s shifting of the economic goalposts and the persistent effects of fiscal “drag” could enable him to reach the end of the economic cycle with his “golden rule” — that the government can only borrow to invest within any given cycle — unbroken.
Spencer does not, however, see how the UK economy can achieve the growth predicted in Brown’s pre-budget report. “If last year’s fuel price rises are anything to go by, a rise in the cost-of-living will hit the consumer’s purse rather than trigger a second round of wage hikes.
“Export performance has been disappointing against a background of strong world economic performance and a marked pick-up in UK investment is unlikely while output remains below trend. It’s going to be interesting to see how Treasury economic forecasters square this circle on 22 March.”
This article was published in the Sunday Herald on 19 March 2006