FOOL'S EYE VIEW
Budget 2002

By James Carlisle and Stuart Watson (TMFTiger)
April 17, 2002

Here is your whistlestop guide to the main points made in today's Budget. As always, the devil may be in the detail, namely the fine print of the accompanying notes to the Chancellor's speech. So don't assume the following list is definitive!

The Economy

There were no great revelations in terms of economic data. The outcome for GDP in 2001 was 2.2%, just below the 2.25% to 2.75% range that had been forecast. The new Treasury forecast is for growth of 2.0% to 2.5% in 2002, increasing to 3.0% to 3.5% in 2003, before easing back to 2.5% to 3.0% in 2004. The Treasury has settled on a trend growth rate of 2.75% going forward, although the Government has said it will use 2.5% in its calculations to be 'prudent'. On monetary policy, the Chancellor took the opportunity to confirm that the Bank of England's inflation target of 2.5% is symmetrical, meaning that an undershoot should be regarded as being as serious as an overshoot.

The NHS

As had been widely predicted, the biggest news to appear was that the Government is to pump more money into the National Health Service. This follows the Wanless report, published this morning, which predicted that the cost of the NHS will more than double in real terms over the next 20 years. In all, NHS spending is forecast to be £65b in the current year, £72b in 2003/4, £74b in 2004/5, £87b in 2005/6, £96b in 2006/7 and £106b in 2007/8. That ties in closely with the Wanless forecast of a real cost of £96b in 2007/8. The extra NHS funding will mostly be covered by a hefty increase in National Insurance...

National Insurance

National Insurance for employees will be raised from 10% to 11%. This is will be paid on earnings between £4,615 a year and the upper earnings limit of £30,500 a year. In addition, 1% will be paid on any earnings above the £30,500 limit. Although this stops short of removing the upper limit altogether, it means everyone pays 1% more tax on all earnings above £4,615 a year.

Employer's National Insurance will also be increased, from 11.8% to 12.8%. There was no relief for the self-employed either. Class 4 National Insurance contributions are to be increased from 7% to 8%.

Income Tax

Income tax rates remained at 10, 22% and 40%. For 2002-03, the 10% band starts at taxable income of £1,920 (£1,880) and the 40% band starts at taxable income of £29,900 (£29,400).

The tax-free personal allowance is increased to £4,615 (£4,535). There will no increase in this allowance for 2003-04 to help with the increased expenditure for the NHS. For those over 65, inflation-busting increases in the age-related personal allowance were announced. These will be available to pensioners who earn less than £17,900.

Tax Simplification Shock

Credit where credit is due (no pun intended) because, for once, something has apparently been done to simplify taxation. Two new reliefs, the Child Tax Credit and the Working Tax Credit, are to be introduced to streamline the existing range of benefits, allowances and reliefs.

The Child Tax Credit will replace the child elements in Income Support, Jobseeker's Allowance, Working Families' Tax Credit, Disabled Person's Tax Credit and the Children's Tax Credit.

Meanwhile, the Working Tax Credit will replicate the adult support from the Working Families' Tax Credit and Disabled Person's Tax Credit. The principles of these two reliefs will also be extended to adults without children, to 'make work pay'. It sounds like Greek at the moment, but it seems that at least the intention is to simplify matters.

CGT, Inheritance Tax & VAT

The annual capital gains tax exemption rises to £7,700 (£7,500) but no mention was made of any changes to the annual ISA allowance. The inheritance tax threshold rises to £250,000 (£242,000).

There were further cuts announced for capital gains on business assets in order to encourage entrepreneurs and a reduction in corporation tax for small businesses from 20% to 19%. No corporation tax will be payable for companies with profits of less than £10,000. A flat rate scheme for VAT for businesses with turnovers of less than £100,000 was also introduced to cut down on their administration costs.

Stamp Duty

No changes were announced relating to the rates for stamp duty, which is payable on the purchase of property, shares and other assets, although a programme to modernise the underlying systems behind this tax was flagged.

Booze, Fags and Bingo

There was good news for drinkers, with duty on spirits being frozen for the fifth budget in succession and duty on beer and wine being frozen for the second year in a row. However the duty on 'ready-to-drink' beverages (things like Smirnoff Ice), hitherto on a concessionary rate, will be brought into line with the duty on spirits.

Apparently motivated by a desire 'to celebrate the talents and skills of the nation's small brewers', the Government will make additional concessions for smaller breweries producing less than 3 million litres per year. Those breweries producing up to half a million litres per year (a mere 880,000 pints) will see their duty halved, amounting to a reduction of £40 per barrel. If you take a barrel to be two kilderkins and a kilderkin to be two firkins (which are themselves, of course, nine gallons), then the saving works out at about 14p per pint. Three cheers for that!

Finally, there was more good news for sinners as the Chancellor followed the abolition of betting duty with the removal of tax on winnings at Bingo.

More: FT Budget web site | Inland Revenue