Fishburn Hedges

21.04.2009

Alistair Darling doesn’t look like the type to phone in sick, but few could blame him if the thought had crossed his mind last night, as he prepared to present one of the most difficult Budgets of post-war years. 

Darling tried to make the best of a dire combination of rising debt and reduced revenues by asserting Labour’s plan to invest to grow, rather than cut its way out of the recession. He also put clear water between Labour and the Conservatives on spending and tax, linking initiatives announced today to sustainable recovery and investment for future growth.

In many ways, this was a return to traditional Labour, with Darling stressing fairness and opportunity, raising taxes for the highest earners (the first Labour Chancellor since the 70s to do so), and offering extra cash for pensioners and families receiving tax credits. He also offered continued support for those hit hardest by the recession - the unemployed, under-25s entering the job market and first-time buyers.

On the other hand, this Budget also saw the influence of Lord Mandelson, and echoes of New Labour, in both message and substance. Alongside the narrative of support for those struggling in the recession, the Chancellor set out a strategy for targeted growth, focussed on green measures to kick start a ‘carbon recovery, and incentives for bio-tech, advanced manufacturing and digital, and he offered more support for SMEs and the housing market.

But ultimately, Darling could not escape the stark reality of the figures, with borrowing set to hit a record £175bn, the national debt due to be 79% of GDP by 2013/14 (double the level when Labour came to power in 1997), and the economy due to contract by 3.5 % in the current year, the biggest one-year shrinkage since 1945. The Chancellor gamely stuck to his forecast of pick-up by the end of 2009, with a prediction of 1.25% growth next year and annual growth of 3.5% from 2011.

The Chancellor will be desperately hoping the Budget will convince analysts that he has the correct strategy to balance the books whilst preparing for growth. But with some including the IFS and CBI, already casting doubt on the Chancellor’s forecasts, the punishment from the electorate, should he be seen to have failed, is likely to be brutal.

Opposition response

The Conservatives gave a damning response, with David Cameron pouring scorn on Darling’s growth predictions as ‘a fiction’ and standing by a strategy of public spending cuts to bring the deficit down in response to ‘Labour's decade of debt’. The charge that the Opposition Leader now needs to stick, is that the Government has lost all economic credibility, in contrast to the Chancellor’s argument that this recession has unique global origins and that the UK can weather the storm better than most.

There is now a genuine difference of approach and certainly emphasis between the main parties on how to manage the economy, with Osborne and Cameron pushing the case for tighter public spending with increasing confidence, believing that they can take the electorate with them. Nick Clegg, for the Lib Dems, accused the Chancellor of dodging the difficult decisions that are needed to deal with Britain’s rising debt and of filling the Budget with recycled announcements and a few ‘clever’ tax rises aimed at the rich.

Public spending and taxation

The Chancellor headlined a strategy of ‘spend and invest’, but nevertheless, spending was cut. Determined to avoid being seen to threaten the public services, the Chancellor set out a further £9 billion in “efficiency savings” in Whitehall on the back of a plethora of value for money reviews, and announced a reduced rate of growth in public spending from 1.1% to 0.7% in 2011-12, lower than under Margaret Thatcher.

All too aware that Labour faces an election by June 2010, Darling packed a trap in his red box. By raising income tax from April 2010 to 50% and restricting tax relief on pensions for those earning more than £150,000, and limiting personal allowances for those on £100,000, he both guaranteed additional revenue and tried to paint the Opposition into a corner, with Cameron facing the decision of whether to back or reverse the policy.

Housing

Darling announced measures to address the dramatic effects of the credit crunch on the housing sector. He gave a boost to the construction sector, with a £600 million intervention package to secure housing developments that have not gone ahead or been left unfinished. He also announced that the Government will delay the introduction of the community infrastructure levy until 6 April 2010. To give a boost to first-time buyers, Darling announced extending to the end of this year the suspension of stamp duty on properties costing £175,000 or less.

Targeting vulnerable homeowners, the Government is to widen the eligibility criteria for the Mortgage Rescue Scheme so that households in negative equity are not excluded. It will also introduce a £20 million fund to enable local authorities to extend small loans to families at risk of homelessness through repossession or eviction. Finally, a stand-alone £50 million has been earmarked for the development of Armed Forces accommodation.

Support for business

As expected, Darling shied away from major changes to the business tax regime or regulation that would have unsettled business and stalled recovery. He also resisted calls for wage subsidies and a fund to cover employees moved to short-time working. Instead, the focus was on extending existing business support schemes.

Businesses will now be able to spread increases to business rates across three years, and a scheme where companies expecting to make losses can reduce their tax bills will be continued. A reclaim fund, which gave money to firms whose core trading is sound but made losses due to lack of credit, will also be available for an extra year into late 2010. Darling also announced initial details of an insurance plan to support small and medium enterprises if private sector insurers reduce their cover. As part of the Government’s overall thrust to support forward-looking, high-value and eco-friendly industries, capital allowances – cash for investment that firms can claim back – will be increased too.  Businesses may also take advantage of a number of niche but lucrative privatisations, with £16bn worth of state assets to be realised over the next 3 years.

‘A carbon recovery’

In line with the Government’s vision for sustainable growth, there was a firm emphasis on a “green recovery”.  Support is being made available to accelerate new green energy development with: £525m for off-shore wind; new funding to finance 2-4 carbon capture and storage demonstration projects; the exemption of Combined Heat and Power plant projects from the Climate Change Levy; £405m to drive the application of new technology and investment in small scale projects so as to encourage low carbon energy and advanced green manufacturing in Britain; and access to £4bn of new capital from the European Investment Bank.

A further £435m is being made available for energy efficiency in homes, businesses and public building. The importance of R&D was trumpeted, with further support for the biotechnology, advanced manufacturing and digital sectors through a £750m Strategic Investment Fund. Support is also being made available for North Sea Oil companies to squeeze further value from their oil fields and exporters to sell more of their products and services abroad through improvements to the Export Credits Guarantee Department.

Transport

The widely trailed transport headline from the Budget was the announcement of a temporary car “scrappage” scheme, which provides a £2,000 grant to consumers buying a new vehicle.  The scheme will be open to motorists replacing a car more than ten years old, which they have owned for more than a year and it will run until March 2010. The Government has set aside £300m to fund it, although this will be matched by funding from participating manufacturers.  The exact details are unclear but the Transport Secretary is due to bring forward proposals next month.

The Government also used the Budget to underline its commitment to ultra-low carbon vehicles, including electric cars with £250 million of funding. Budget also saw an increase in fuel duty by 2p per litre on 1 September 2009, and by 1p per litre in each year from 2010 to 2013.

Savings

Given the balance sheet, there was very little that the Chancellor could do to help savers, without resuming control of interest rates.  Darling did however boost the tax-free annual limit for ISA savings to £10,200, with up to £5,100 of this in cash.  The new limits will be introduced for the over 50s from this year, with everyone else benefitting from next year. Other help announced for older people was for those grandparents with caring responsibilities for grandchildren having the opportunity to have their responsibilities count towards the basic state pension through National Insurance credits. In addition, the basic state pension will rise in real terms and not be tied to the RPI which is expected to fall by 3% this year.

Jobs and skills

Consistent with the theme of fairness, and set against this morning’s news that unemployment has risen to 2.1m, Darling announced that the Government will make more than £2bn extra spending available for the unemployed. Details include a significant increase in funding for Jobcentre Plus and an assurance that those under the age of 25 who have been jobless for more than a year will be offered a job or training. This is coupled with funding to create 54,000 new places in sixth form education, and an investment of £260m to help people get work experience or training in growth industries. But with analysts predicting ‘a lot of pain in the pipeline’ with unemployment figures set to get much worse, the famous Conservative campaign slogan “Labour isn’t working” must be Gordon Brown’s biggest fear ahead of a nearing election.

Families

The Chancellor announced a series of measures to assist the families and those individuals requiring targeted support, including an additional payment alongside this year’s winter fuel payment worth £100 for households with someone aged over 80 and £50 for households with someone aged over 60. Other help announced for older people was for those grandparents with caring responsibilities for grandchildren having the opportunity to have their responsibilities count towards the basic state pension through National Insurance credits. In addition, the basic state pension will rise in real terms and not be tied to the RPI which is expected to fall by 3% this year.

Finally, the child tax credit will rise by £20 by 2010 and Child Trust Funds for disabled children to rise by £100 a year, and £200 a year for severely disabled children.