MONEY COMMENT
The Budget - Bingo, Babies, Borrowing and Bubbles

By Stuart Watson (TMFTiger) and Cliff D'Arcy
April 9, 2003

Gordon Brown's seventh Budget contained few surprises and seemed to go down well with the pundits and the financial markets. 

The UK economy is slowing. Having trimmed growth forecasts for this year last November, the Chancellor announced another haircut today. The previous forecast range of 2.5%-3.0% has been reduced to 2.0%-2.5%. But for 2004 (and for 2005), a pickup in the global economy is being anticipated, so growth forecasts have been maintained at what many feel is a slightly optimistic 3.0%-3.5%.

Much has been written about the government's need to increase borrowing (despite previously announced tax increases like the 1% extra on National Insurance) if it is to stick to its promises on spending. For this year, the government increased its borrowing forecast from £24b to £27b, a little less than expected. The national debt is expected to be 32.2% of national income, below the self-imposed limit of 40%.  

Europhiles and eurosceptics will want to make a note in their diaries for the first week of June. That's when the government will give its assessment of the five economic tests relating to the entry into the euro.

Pricking The Housing Bubble

No changes were made to the main stamp duty rates on housing. They remain at:

• 1% for £60,000-£250,000
• 3% for £250,001-£500,000
• 4% for over £500,000

The Chancellor acknowledged the risks of a volatile housing market to the economy. Consequently, he has commissioned a couple of reviews that may lead to measures that let some air out of the housing bubble.

First up is a review of the house-building industry and the antiquated planning system. One of main reasons for the recent rise in house prices has been a lack of new housing.

The second will look at why the UK has such a low proportion of fixed-rate mortgages compared to other countries and what risks this entails. Just over a third of new mortgages are fixed rate and fixes for more than 5 years are highly unusual. In other countries, fixes for the whole term of a mortgage are more common.

Both these reviews look eminently sensible, but we'll have to wait and see what sort of proposals they come up with. Interim reviews are due this autumn. The Chancellor also announced a number of measures to modernise property taxation, primarily commercial property.

Families With Children

The government is aiming to halve child poverty by 2010. We already have Child Tax Credit (which is means tested) and Child Benefit (paid to all parents). But there was more good news for parents today: free money for babies!

The Chancellor is introducing Child Trust Funds (CTFs) for all children born since September 2002. With 700,000 children born in the UK every year, this is a big scheme to improve the future prosperity of our nation and promote saving.

At birth, each child receives a lump sum of £250 (£500 for children in families who qualify for the full Child Tax Credit, about a third of all children), which will build up into a tidy sum over 18 years. Parents, family members and friends can also contribute, up to an annual limit of £1,000.

The chancellor hasn't indicated what type of investment will be used. He also didn't comment on whether CAT standards would apply, although this is likely. More details on the CTF scheme will be published this summer.

Other benefits for families with children include:

• tax relief for employers contributing to home-working costs (which increases the incentives for employers to offer flexible working arrangements to parents); and
• a personal tax exemption for foster carers earning less than £10,000 a year (to facilitate the recruitment and retention of carers).

Pensioners

After the fiasco of the 75p-a-week rise in the basic State pension in 2000, the chancellor wants to be seen to be doing right by pensioners and the elderly. Hence the introduction of the means-tested Pension Credit in October 2003, estimated to cost £2 billion in its first year.

Around half of all pensioner households stand to gain an average of £400 a year thanks to the Pension Credit, with the worst-off getting up to £1,000. The government's target is to pay the credit to three million households by 2006. Other measures were:

• the winter fuel payment paid to pensioners 80 and over will be increased to £300 from the current £200; and

• pensioners having long-stay hospital treatment will no longer have their benefits slashed after spending six weeks in hospital. From now on, pensioners can be in hospital for 52 weeks before their benefits are cut back.

Sin And Motoring Taxes

Duty on beer is up 1p a pint, while duty on wine is up 4p a bottle. Spirits, cider and sparkling wine are unchanged (break out the fizz!). Duty on a packet of 20 cigarettes rises by 8p.

Bingo duty (bingo being the greatest sin of all) on stakes and prizes will be abolished and replaced by a flat 15% tax on the gross profits of bingo operators from 4 August.

Fuel tax on petrol will not automatically increase in line with inflation (or the so-called "fuel price escalator"), but will increase by 1.3p per litre in October. From 1 January 2005, the tax on environmentally friendly bioethanol fuel will be 20p per litre less than the rate for sulphur-free petrol.

Road tax is frozen for lorries and motorcycles, but is up £5 for cars (£110 for engines under 1,549cc; £165 above). However, owners of the least polluting cars will pay just £55.

Tax Rate Stuff

Nothing radical was announced with respect to the main tax rates and allowances. Unfortunately, there appeared to be no last-minute reprieve for ISA tax credits.

                          2002/3        2003/4
                               £             £
Personal allowance         4,615         4,615
CGT annual exemption       7,700         7,900
Inheritance tax          250,000       255,000

10% tax band             0-1,920       0-1,960
22% tax band        1,921-29,900  1,961-30,500
40% tax band         Over 29,900   Over 30,500

There's a handy little Excel file on the Inland Revenue's web site if you want to see how these changes affect you.

More: Discussion boards for the Budget and Taxes.