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This year’s Pre-Budget Report
(PBR) will have one aim and one aim only – to ensure that Gordon Brown reclaims
the political initiative from the revived Conservative party. We expect some
fairly large tax cuts purely intended to grab the headlines and shoot the
Conservatives’ fox. But, in order to head off accusations of fiscal
recklessness, these will be funded mostly by low-profile tax rises elsewhere.
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The PBR will include measures
unashamedly aimed at taking the wind out of the Conservatives’ sails. It is
possible that the Chancellor, Alistair Darling, will match exactly the
Conservatives’ pledge to cut inheritance tax and stamp duty at a total cost of
£4bn. More likely, however, is that he makes his policies distinct by lowering
the rate of inheritance tax from 40% to 30% or raising the £250,000 stamp duty
threshold by £100,000. Together these measures would cost £2bn.
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The corporate sector is also
likely to be brought on-side. One possibility is a cut in the main
corporation tax rate of a further 1%, which would cost around £1.5bn. Meanwhile,
slashing the rate of capital gains tax from 40% to 30% could cost the Treasury
around £1bn.
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But by clawing back any tax
cuts with some populist rises in green taxes and changes to the tax treatment of
private equity, the Chancellor will aim to appear generous and fiscally
responsible at the same time. Such measures, which may include hitting
owners of 4x4 cars or the airline industry, could readily yield around £2bn. And
he may raise more in the form of tax evasion and public sector efficiency gains.
Banks and oil companies are likely to be passed over this time.
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An alternative would be to fund
the measures intended to counter the revived Conservative party’s pledges with a
further squeeze on public spending. But Mr Brown will not be keen to announce
yet tighter spending constraints. As such, the spending envelopes that were
already announced in March’s Budget are unlikely to change. And the new
departmental allocations are likely to be eye-wateringly tight even for
education and health.
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If Mr Darling cannot raise
enough cash to fund his headline-grabbing give away, the result will be higher
borrowing. The forecast for 2008/09 may rise from £30bn to £34bn, mainly due
to a downward revision to his 2008 GDP growth forecast from a mid-point of 2¾%
to 2½%. But if growth were to come in at 2% next year, as we expect, borrowing
would rise further to £37bn. And growth of 1% would see borrowing shoot up to
£42bn.
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Overall, the PBR will bring
short-term political gain for long-term fiscal pain. This is a trade-off that
Messrs Brown and Darling are willing to accept, but one that might return to
haunt them.
Roger Bootle is economic adviser to Deloitte.
About Roger Bootle
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