FOOL'S EYE VIEW
Pre Budget Highlights

By James Carlisle And Stuart Watson (TMFTiger)
November 27, 2001

Great Titchfield Street, London -- The biggest shock in today's statement was that Gordon Brown only managed one "prudent" and one "prudence" in his speech. Perhaps married life is turning him into more of a risk-taker. Here's a quick rundown of some of the main points but, as usual, the devil is often in the detail. We may yet see other developments crawl out of the paperwork as the full reports are digested. 

The Economy

The UK economy is apparently bearing up well in the face of the global downturn. While the US economy recently fell into negative growth, the Chancellor expects GDP to increase by 2.25% this year. That's at the bottom end, though still within, the 2.25% to 2.75% growth rate that he forecast this time last year, despite a very difficult period for the global economy. Next year, he's predicted 2% to 2.5% with 2.75% to 3% for the year after.

So it seems that Gordon is saying boo to those that would place the UK in recession. He offered part of the credit to the Bank of England, whose interest rate cuts have kept the economy on track and, significantly, stressed that "deflation is as unacceptable as inflation" and that the Bank of England's 2.5% inflation target was "symmetrical". With inflation consistently undershooting for the last couple of years, and forecast to stay that way for the time being, that has to be seen as an encouragement for further interest rate cuts.

On the National Debt, Brown kept the focus on last year, when a mammoth £37b was repaid thanks to the Government's windfall of £22.5b from the 3G licence auctions. Even so, to have generated an extra £14b is impressive given the economic environment. This has brought the national debt down to 31% of GDP - the lowest of all the G7 nations. This year Gordon expects a surplus of £10.25b, down from £17b at the time of the 2001 budget. The forecast surplus for next year is also reduced, from £15b to £3b, before we return to a surplus of £8b for 2003/4 and £9b thereafter, as predicted in the 2001 budget.

As usual, there is some tinkering to incentivise investment in certain areas. No doubt it will be helpful for some, but with new rules appearing every year, it's hard to square with the alleged desire to reduce red tape. Tax credits will be introduced for spending on research and development as well as skills training, while stamp duty will be abolished on property transfers of up to £150,000 in certain disadvantaged areas. There will also be a "package of measures to support small business, improving access to finance, reducing the administrative burden of VAT and publishing a review of payroll administration". We shall have to wait and see what it entails.

Taxes For Individuals

Nothing overly exciting was apparent at first sight. Most allowances are to increase at just under 2%, the current rate of inflation. The Personal Allowance for 2002/3 will rise to £4,615, the starting rate of tax will increase to £1,920 and higher rate tax will kick in from £29,900.

The capital gains tax exemption will go up to £7,700 and inheritance tax exemption rises to £247,000. There will also be further taper relief for capital gains tax on business assets (i.e. owners selling their business not individuals buying and selling ordinary shares on the stock market).

There had been some speculation that National Insurance might be increased for high earners. But the top rate will only rise in line with inflation, to £585 per week (just over £30,000 a year).

Current tax rates can be found here.

Pensions

A lot of noise was made about the commitment to pensioners. The poorest pensioners currently get a Minimum Income Guarantee. This is paid out to around 2m of the UK's 11m pensioners.

From 2003 a pension credit will be introduced to "reward pensioners for having built up savings during their working lives or for carrying on working beyond retirement age". This will benefit single pensioners whose income is below £135 a week and married ones whose income is below £200 a week. Over 3m people are expected to receive up to an extra £1,000 a year under this new system - full details are to be published on Wednesday.

In addition the Winter Fuel payments of £200 will be paid for the remainder of this parliamentary term and the over 75's will receive a free TV licence. It was also stated that the Basic State Pension would increase by at least £100 a year for single pensioners and £160 for couples. That's equivalent to about 2.5% a year at the moment, only just ahead of inflation.

The NHS

Apparently a report conducted by Derek Wanless has concluded that "there is no evidence that any alternative financing method to the UK's would deliver a given quality of healthcare at a lower cost to the economy". This appeared to cause many of the opposition to choke on their afternoon sherry as much heckling ensued for the rest of the Pre Budget statement. The other main conclusion was that the NHS service needed "significantly greater capacity and significantly more long-term investment". Wanless's full report is to be presented next year, prior to final decisions being taken in the 2002 Spending Review. However, it was said that it would "be right to devote a significantly higher share of national income to the NHS".

More: TMF Tax Centre | Pre Budget website