Nigel Pickard, partner and head of tax at professional services firm Deloitte in Birmingham, believes the Chancellor will look to boost business activity by bringing forward public sector spending plans.
Any hopes that this Budget might deliver a significant boost to the economy have probably been dashed by further deterioration in the UK’s public finances and the general swing in opinion against the wisdom of a major fiscal stimulus. But that doesn’t mean that it will be a complete non-event.
After all, it is almost unimaginable that the Chancellor will stand by and do nothing in response to the continued weakness of the economy.
So just what measures might Mr Darling announce and what impact might they have on the economy? For a start, we suspect that he will still feel able to make a small net giveaway in the next year or two, perhaps of the order of £5?billion to £10?billion.
Secondly, even within tight fiscal constraints, the Chancellor can attempt to boost the overall level of activity by redistributing spending power to those parts of the economy most likely to utilise it.
And further ahead, Mr Darling is likely to put in place some measures to try to bring borrowing back down over the medium-term.
So how will he achieve all of this? Well, one way of boosting activity in the near-term without raising the long-term path of borrowing is to bring forward already planned public sector spending. The Pre-Budget Report (PBR) brought forward almost £3?billion of capital spending from 2010-11 to this year and next. But there have been suggestions since the PBR that a number of capital projects have been slow to get off the ground, perhaps casting some doubts over the feasibility of bringing forward yet more.
Meanwhile, the scope for reducing borrowing further ahead via a cut in spending is also limited by the fact that the existing plans already incorporate a very tight squeeze on current expenditure after the deep cuts made in the PBR.
Real spending is set to grow by an average of just 1.1 per cent per annum between 2011-12 and 2013-14. With social security spending and debt interest likely to rise, it suggests that many government departments will see spending freeze in real terms, or even fall. Further efficiency savings on top of the £5?billion per annum identified in the PBR might be possible, but there are clear doubts over whether these can actually be delivered.
Given all of this, it seems likely that any significant shifts in discretionary fiscal policy in the Budget are likely to come primarily in the form of tax changes.
One possibility is another change in VAT after the PBR’s temporary reduction to 15 per cent. Extending the cut by another year to the end of 2010 would cost about £12?billion. But this would delay the expected surge in spending ahead of the reimposition of the previous rate and could therefore actually reduce spending and activity in 2009.
Another possibility is therefore to pre-announce a second increase in VAT at the end of 2010, perhaps to 18.5 per cent or even 20 per cent. This would have the twin attractions of both raising revenue in the future and providing a further possible boost to spending in 2010.
Widening the VAT net, which currently captures only around half of goods and services is also another option.
Other possibilities include measures to improve conditions in the labour market, such as help for employees moved to short-time working and tax breaks for employers; more measures to support the housing market, like a further extension of stamp duty; the sale of some public sector assets; and changes in the thresholds for income tax and National Insurance.
Finally, Mr Darling could turn to higher rate taxpayers again after announcing a rise in the top rate of income tax on earnings above £150,000 to 45 per cent from 2011 in the PBR.