Budgets are supposed to look better in the cold light of day, after a decent period of reflection, rather than in the heat of political battle, suggests David Smith
The old truism, that a budget applauded to the rafters in the House of Commons on the afternoon will almost certainly be regarded as a disaster six months later, still holds true.
So the fact that Alistair Darling’s first budget appears to have gone down badly with voters should not trouble us greatly. Mid-term budgets, after all, are supposed to be unpopular. It was the possibility of a snap general election that led to some pretty poor decisions in the October pre-budget report (PBR).
The PBR included that shake-up in capital gains tax (CGT) that business will take a long time to forget, or forgive. Would Darling recant in his budget? No, though he confirmed that the £1 million ‘entrepreneurs’ allowance’ would soften the shake-up’s blow. The new reality, though, is that 18 per cent has become the norm for CGT.
On ‘non-doms’, that other hangover from the PBR, Darling announced some more significant concessions, particularly on the question of whether the new levy would be subject to double taxation. But the central thrust of the policy, a £30,000 annual charge for non-doms present in the UK for more than seven years, remains.
Well-informed commentators such as the Institute for Fiscal Studies had pointed out that the black hole in public finances persists, and that taxes will ultimately have to rise by something like £8 billion.
Business knows only too well that it has frequently been the target for chancellors hungry for revenue. So, while the additional taxes announced on alcohol and higher-emission cars will affect some industries profoundly, consumers were the main target of a tax hike that will add up to £1.9 billion, less than a quarter of the IFS’s number. This one, however, bears watching.
In the absence of very big tax changes, the main interest in the budget was how the Treasury chose to play the economic outlook. In fact, while the budget did revise down his growth forecast, his central message was that Britain will ride out the global credit storm. In his place I would have done the same thing. There was nothing for him in adding to the gloom and risking accusations of helping to talk Britain into recession. Better to err on the side of optimism.
So growth this year is put by Darling at 1.75 to 2.25 per cent, and is then seen as picking up to between two and 2.5 per cent next year. Inflation, currently boosted by escalating energy and commodity prices, is projected to return to the two per cent target next year.
Will this prove to be wildly optimistic? A decade ago, when there was also a crisis swirling around the world’s financial markets, the Treasury projected just one per cent growth for 1999 and was attacked for wishful thinking. In the event, the economy grew by three per cent.
How about manufacturing? The good news is that the Treasury expects growth. The bad news is that it thinks that growth will continue to be quite subdued. So this year manufacturing output should expand by between 0.75 and 1.25 per cent, and next year and the year after by 1.75 to 2.25 per cent. Not bad, but still slower than the growth of the economy as a whole. We can only hope the Treasury has been deliberately conservative.
Apart from that, there was not much of great significance in it for manufacturers. The Engineering
Employers’ Federation found things to praise in the detail, including an extension of the small firms’ loan guarantee scheme, an additional £30 million in so-called mezzanine finance and increased flexibility for investors using the Enterprise Investment Scheme.
As Steve Radley, chief economist of the EEF put it: “The innovative package of measures to improve access to finance will give small and growing businesses greater flexibility in attracting the funds they need to invest in innovation and growth. This comes at an especially opportune time given the current credit crunch.”
Expectations were low for the Chancellor’s first big outing, and were duly delivered. The question for him, and for business, is whether he leaves himself room to do something in future that might be more helpful.