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The Budget Tightrope
I would suggest that the Chancellor will have his work cut out, on Wednesday, when he stands up to deliver his second budget of 2017. The first time around the Brexit negotiations hadn’t started, the Conservatives had a majority in Government and whilst the ONS were predicting growth in the economy there was obviously a fine balance to be struck between taxes and spending.
This time around he has to walk a tightrope between the differing sides of his party: those who want him to deliver a confidence budget, spotlighting Britain’s place in the world post Brexit, and those who have one eye on the Labour Party and the pledges that they have made that have struck a cord with the British public and led to a coalition Government.
The weekend papers have been full of talk about increases in spending on the NHS and Education and, if the Chancellor is going to increase spending here where the public clearly wants to see improvements, he needs to balance this with his longer term aim of producing a balanced budget, albeit that this is now someway off. He will want to address the productivity issue that has plagued the UK for many years especially, as the number of unemployed continues to fall so the pool of workers available to deliver the increase we need shrinks. To drive economic growth, what the country really needs is to increase productivity from the current workforce. This will mean looking at large public projects that keep firms busy and increasing or extending capital allowances and perhaps R & D tax credits for the short term, which will encourage businesses to spend.
To pay for all of this I would expect further reform of pensions relief so perhaps the Chancellor will remove the higher rate tax relief altogether although, more likely, he will reduce the £150,000 tapering threshold for pension relief to £100,000 so that it matches the limit for loss of personal allowances.
Whilst this would increase the tax take I do think that there may be room for him to make one of the radical changes that have been suggested, in relation to VAT (see David Graham’s Article on this subject). For a long time it has been speculated that the high rate of VAT has limited growth as businesses do not want to exceed the threshold and start paying 20% on their profits. One suggestion is to stagger the threshold so that it comes in at lower income levels but also at lower rates. As we have one of the highest VAT thresholds in the world, the Chancellor may feel that this is not only possible but it would perhaps help boost the country’s productivity as well as increasing the tax take to pay for the spending he has outlined.
With all this in mind, it will be interesting to see if the Chancellor can cross this tightrope unscathed and still have his job at Christmas.
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