Tuesday, October 09, 2007
Modest in most respects - some initial thoughts on Darling
Posted by David Smith at 05:30 PM
Category: Thoughts and responses

Alistair Darling did not set the House of Commons on fire with his first pre-budget report - available here - and, to be frank, on first perusal there was not all that much to get excited about in the forecasts and proposals either.

If there is a sharp slowdown/recession coming, the Treasury has not spotted it. After 3% this year, growth will slow to 2% to 2.5% next year, before resuming its previously-forecast path of 2.5% to 3% in 2009, a growth rate that is predicted to continue in 2010. There has been a lot of speculation about consumer retrenchment and an end to the borrowing boom. In fact, the Treasury expects the saving ratio (which is net of borrowing) to stay low; 3.5% this year, 3.75% next year and 4% in 2009. All three numbers were about two percentage points higher (5.5%, 5.75% and 5.75%) in the March budget.

Darling had the excuse of the credit crisis to blame for slower growth, and he used it to raise his borrowing forecasts, continuing the tradition established by Gordon Brown. So net borrowing, 38 billion in 2007-8, is 4.3 billion higher than in the budget, 2008-9's 36 billion is an upward revision of 6 billion, and 2009-10's 31 billion is up 3 billion.

The biggest changes were in the capital taxes. Brown was proud of the capital gains tax (CGT) system he established, with the rate tapering down to 10% for business assets after two years. That has now gone, replaced by a flat 18% rate for all capital gains tax payers, including second home owners. Many businesses will feel they are paying for the excesses of private equity high rollers.

There is also an openly populist move on inheritance tax, allowing transferable allowances between husbands and wives, backdated to cover widows and widowers. That means effectively raising the threshold to 600,000 - and 700,000 by 2010, at an annual cost by then of 1.4 billion. The CGT change will bring in 900m.

That shot two Tory foxes - raising the inheritance tax threshold and recognising marriage (and civil partnerships) - and Darling also lined up another one. George Osborne, the shadow chancellor, proposed a 25,000 annual levy on "non-doms". Darling proposes one of 30,000, although not kicking in until they have been here for seven years.

As for public spending, the overall increase, 2% a year over the next three years in real terms, was in line with the Treasury's previous numbers, though the size of the public spending envelope in cash terms is a little higher. Health gets 4% a year, compared with 7% plus in recent years. Education will receive 2.8% a year, slightly more than expected.

Darling will be criticised for stealing Tory ideas. Some will doubtless claim that the shenanigans of recent weeks were all intended to smoke the Tories' out. I don't think so. And the fact that the government has only now, and belatedly, acted on inheritance tax and non-doms suggests the campaign leading up to the next election will be a long one.

Comments

As somone who started a private company 15 years ago, I am rather disgruntled that there will be no retirement relief or asset taper relief when I sell up. Necause of taper relief, I had planned to keep reinvesting profits in the business. Now it seems I may as well get into buy to let property. The galling thing is that its being spun as a tax on private finance, but I'm sure that their top flight accountants will be able to minimise the effect. Not so for the small business. I'm sure it would have been possible to keep some form of taper relief for long term owner managed businesses.

Makes me wonder why GB reduced the time to qualify for maximum relief down to two years. That seemed perverse at the time and I feel that the long term owner manager is suffering for that decision.

Posted by: jones at October 9, 2007 09:30 PM

The move on inheritance tax seems to me a total red herring. On the Sunday Times Money section front page this week, it explained how a very simple Trust could be set up to create this exact state! So what has actually changed?
This just means a visit to a lawyer is no longer needed, to ensure both allowances are used.
My understanding was that the Tory proposal went much further in increasing the allowance to 1m per person, which a savvy tax lawyer could then double to 2m for a married couple.

Posted by: Simon at October 10, 2007 07:56 AM

Small business has a right to be angry about this. Now second home owners will pay the same CGT rate as those who have built up a business.

In terms of inheritance tax the Tory proposals, by the same token, implied a husband-wife threshold of 2m. But the fact that there is a cost to Darling's move - 1.4 billion in a full year by 2010 - implies that not everbody was availing themselves of tax planning.

Posted by: David Smith at October 10, 2007 10:04 AM

Jones,

To be honest you are better off speaking to a tax lawyer. Accountants work for the taxman. A good tax lawyer will cost you but so long as the number crunchers can do the figure work, you will probably get further employing a brief.

Posted by: F.Fox at October 10, 2007 12:39 PM

Now, Simon,

Why do you think that CGT was changed for second home owners?

Could it be that 50% of wealth in this country (at least for the moment) is in property?

And Mr. Broon trousers is a politician....

Posted by: F.Fox at October 14, 2007 07:55 PM
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