Sunday, March 20, 2005
The Bittersweet budget
Posted by David Smith at 10:58 AM
Category: David Smith's other articles

It was a nervous wait. But the moment Gordon Brown and his advisers started to relax about last Wednesday’s budget came five weeks ago. Until then there had been big questions, including some from Treasury officials, about whether the public finances would be in good enough shape to avoid tax rises or spending cuts just ahead of an election.

The answer came on February 18. Official figures showed a surge in corporate tax receipts in January, a key month for revenues. And, while the picture was not strong enough to meet the chancellor’s forecasts precisely, it did ensure that Brown could continue to claim that his “golden rule” would be met with a margin to spare.

“It meant that we were able to maintain our fiscal forecasts going forward without introducing policy changes,” said one aide. Quite what those changes might have been, however, is not clear. There was, as officials concede, “no plan B”.

The relief may be shortlived. New figures for the public fin-ances on Friday were poorer than expected and, according to John Hawksworth of Price Waterhouse Coopers, mean there is only a 50-50 chance that Brown will meet the golden rule. That, however, is for an-other budget and, some in Westminster say, another chancellor.

As it was, the seriousness with which the Treasury viewed the public finances, and the gossamer-thin margin of error between meeting and breaking a fiscal rule it regards as sacrosanct, were underlined by the budget itself. Breaking with pre-election tradition, there was no giveway. By clawing money from North Sea oil companies, a continued clampdown on tax avoidance and reimposing commercial stamp duty in disadvantaged areas, Brown managed to come up with some sweeteners for pensioners, homebuyers and, albeit only from 2006, some modest help for families with children. But, far from a giveway, the budget succeeded in raising tax by a small amount, £265m.

The Treasury insists that, while they grabbed the headlines, Wednesday’s budget was never about lobbing a few carefully targeted handouts in the direction of floating voters. Brown, they say, had bigger fish to fry.

THE STRATEGY for the budget can be traced back to last September. Brown, having spent the summer in Scotland with his wife Sarah and young son John, had immersed himself in reading material, not about babycare, but about globalisation.

For years, the big obsession at the Treasury and other Whitehall departments had been how to raise Britain’s game in relation to Europe. Why, successive governments had asked, had Britain been left behind by continental economies? This was also the question the chancellor asked when taking office in 1997. His so-called productivity agenda made much of closing the gap with Europe.

But years of sluggish economic performance in Europe have made that question less relevant. Britain’s output per worker matches Germany, but still lags behind France.

Brown’s summer reading convinced him that the real question for Britain was whether it could compete with China, and to a lesser extent India. Last month’s visit to Beijing, Shanghai and Shenzhen was ar-ranged. “Gordon has become obsessed with China,” said one adviser.

The real meat of the budget, Treasury aides say, came in two areas. The first was the commitment to cut red tape, the bane of business. Philip Hampton, chairman of J Sainsbury, was ap-pointed by Brown to advise on cutting unnecessary form-filling and inspections — after years of denial by the chancellor that red tape was a serious constraint on competitiveness.

His proposals, which the Treasury has accepted, involve culling the number of agencies monitoring and inspecting businesses from 35 to nine. According to Hampton, there will be 1m fewer inspections of business premises each year, and a 25% cut in the number of forms firms have to fill in.

Brown also accepted the recommendations of the Better Regulation Task Force, under David Arculus, and set requirements for every government department to reduce the red- tape burden year-on-year. And, in response to business complaints that Whitehall and local authorities regularly “gold- plate” European Union regulations when they incorporate them into British law, he announced new Foreign Office guidelines to guard against this.

These moves were, according to Bill Midgley, president of the British Chambers of Commerce, a “positive step forward”. The BCC has calculated the cumulative red-tape burden under Labour is £39 billion.

“However, British businesses remain deeply concerned about the burden that doubling paid maternity leave will create,” he said. On the one hand, the chancellor is proposing to reduce the administrative burdens on business while on the other he is adding significant burdens by extending parental rights.”

Business, while welcoming the sound of a Labour chancellor committing himself to cutting red tape, is cynical after previous promises have come to little. “If the government manages to implement these proposals, business will be very happy,” said Miles Templeman, director-general of the Institute of Directors. “The key is implementation and seeing fine words translated into action.”

THE OTHER “big idea” for equipping Britain for the future was on education and skills. Last summer Brown announced how much extra money would be spent on education by 2007-8, raising the annual budget from £65 billion now to £79 billion. On Wednesday, he “pre-committed” some of that spending. It included not just a refurbishment programme for primary schools but also measures to raise skills, which the Treasury regards as crucial for Britain’ s competitiveness.

Ministers are particularly concerned about young people falling through the education and training net. Official figures show that 15% of 16 to 17-year-olds — more than 230,000 young people — are so-called NEETs, not in education, employment or training. Brown announced more generous allowances, of up to £75 a week, for them to stay in school, with a target of 90% of young people staying in education or vocational training until the age of 18. Another 150,000 people aged 16 to 17 who are in jobs but receive no training will be given apprenticeships or college-based training.

Skills have become a big focus for the government. This week ministers will launch a white paper on the issue at Heathrow’s Terminal Five construction site. According to the latest survey from the government’s own Learning and Skills Council, to be published this week in a report called Skills in England, a fifth of organisations are being hampered by skill shortages.

“About 20% of the productivity gap between Britain and our competitors can be put down to skill shortages,” said Christopher Banks, LSC chairman. “The nature of the skills req-uired is changing. Over the next decade we are going to see a rise of 567,000 in the number of managerial jobs but a drop of 357,000 in basic administrative and service jobs.

“Meanwhile, we have far too many people in this country who don’t have even basic skills. Often the requirement from employers is straightforward; they want people with good basic skills in numeracy and literacy and a willingness to learn.”

Britain, on the Treasury’s own admission, starts at a disadvantage in meeting Brown’s China challenge. Investment in training has been inadequate in the past, it says, and the proportion of the workforce with low skills or no skills is higher than in competitor countries. “Managers, too, have to recognise the importance of skills,” says Banks.

Businesses welcomed Brown’s commitment to the long-term competitiveness of the economy, including the appointment of Rod Eddington, the outgoing British Airways chief executive, to review problems in the transport system.

The property industry was pleased with the decision to push ahead with property investment funds, otherwise known as real estate investment trusts (Reits), from next year. In the City, not only was the chancellor’s avoidance of an irresponsible pre-election giveaway welcomed, but pension funds and insurance companies warmed to the announcement that the government will issue gilts of up to 50 years’ duration.

FOR business, however, there were several stings in the tail.

To make room for even modest pre-election giveaways, Brown was obliged to turn to the corporate sector to raise the cash. Oil companies, feeling flush on the proceeds of $50-a- barrel oil prices, were in no position to complain about a £1.1 billion raid from changing the timing of their tax payments.

But this, say some analysts, could be the shape of things to come. “He’s going to carry on living from hand to mouth in this way,” predicted Professor Peter Spencer, economic adviser to the Ernst & Young Item club, which uses the Treasury’s own economic model. “This time it was the oil companies, next time it will be a £4 billion windfall tax on the banks.”

According to Spencer, Brown or his successor will need to raise taxes by £10 billion in the next parliament. The Institute for Fiscal Studies, after analysing Friday’s public finance figures, sees the need for a tax hike or spending cuts of £11 billion for the Treasury to be sure of meeting its rules. Price Waterhouse Coopers predicts a hike of between £8 billion and £12 billion. This has got business worried that, politically, it will be the only acceptable target for tax hikes.

“While we acknowledge the chancellor’s record on economic management, we remain concerned of the consequences for manufacturers should he need to increase business taxes to fund his expenditure after the election,” said Martin Temple, director-general of the Engineering Employers’ Federation.

David Frost of the British Chambers of Commerce agreed: “Looking at 2006 and beyond, businesses are very concerned that excessive spending and borrowing may necessitate damaging tax increases.”

That was not the only worry. Brown announced that he would raise £660m in the coming tax year and more than £1 billion in 2006-7 by clamping down on tax avoidances. But experts say he is now using the disguise of anti-avoidance measures to increase business taxes, outlawing legitimate tax planning by firms.

“They are planning to take a lot more tax out of the corporate sector and this is one of the ways they are doing it,” said David Cruickshank, head of tax at Deloitte, the accountants. “Some of these schemes have been in place for years and the Inland Revenue has not complained about them before.

“UK companies are already paying more tax as a percentage of GDP (gross domestic product) than our competitors and the infuriating thing was that these changes were brought in without consultation. It is not good to bring in dramatic changes like this.”

That criticism also applies to another change Brown introduced. For homeowners, in particular for first-time buyers outside London and southeast England, the good news in the budget was the lifting of the stamp duty threshold from £60,000 to £120,000. The change, which the Treasury was lukewarm about beforehand and may have been forced on the chancellor by Tony Blair, will cost £250m.

But that was more than offset by Brown’s surprise announcement that commercial stamp duty, which had been abolished in disadvantaged areas, was to be reapplied at the standard 4% rate from midnight last Wednesday, bringing in £340m.

“We were gobsmacked by this change,” said Stephen Herring, a partner at BDO Stoy Hayward. “It only came in 18 months ago to a big fanfare, and it was supposed to facilitate the regeneration of these areas. People have bought sites on the basis that purchasers weren’t going to have to pay the tax, and now all that has changed.”

The announcement led to a scramble as developers tried to get deals through before the midnight deadline. Such was the surprise of this u-turn, however, that most firms were unprepared, and the change left a nasty taste in the mouth.

FOR BROWN, part of the aim of last week’s budget was political, though mostly it was to focus attention on the long-term challenges facing Britain.

He also hoped to bury doubts about the public finances and switch the spotlight to Tory plans. In that respect the budget failed: as many questions are being asked about whether he will meet his golden rule as before.

There was also a paradox at the heart of his strategy for business and enterprise. On the one hand he pledged a lighter regulatory touch and a government that would show greater sensitivity to the needs of business.

He was also happy, however, to use business as the milch cow for his political sweeteners, and to set the authorities off on a hunt to clamp down on schemes that companies use to minimise their tax.

One of his predecessors, Denis Healey, was said to have been determined to make the pips squeak when it came to high earners. At a time of rising business taxation — and falling tax rates in competitor countries — Brown is in danger of doing that to firms.

From The Sunday Times, March 20 2005