FOOL'S EYE VIEW
Pre-Budget Report 2002

By Stuart Watson (TMFTiger) and James Carlisle
November 27, 2002

Today's Pre-Budget statement had Gordon Brown caught between a rock and a hard place. Plenty of commentators (not us mind) accused the Chancellor of being optimistic with his forecasts at the time of the March Budget and they've turned out to be right. Today, Gordon had to revise down his forecast for GDP growth for 2002 from 2.0-2.5% down to 1.6%.

The effect will be a nasty shortfall in tax receipts, while the Government's ambitious spending plans stretch out before us. Taxes can't go up for risk of prolonging the downturn (not to mention anything about votes) and the spending can't go down (for precisely the same reasons). The result is an awkward gap between what's coming in and what's going out and the solution, of course, is to borrow more money.

The Chancellor says this is okay because we've managed decent surpluses in the last few years (helped along by the £23b that came in from '3G auctions') and the Government's crystal ball is predicting a swift and strong recovery. No matter that it was faulty at the time of the March budget. Anyhow, given how this year has gone, Brown has felt it prudent to swap the GDP growth forecasts around. Instead of going for 3.0-3.5% in 2003 coming down to 2.5-3.0% in 2004, he's now looking for 'only' 2.5-3.0% next year, with his big year coming to the rescue in 2004, with 3.0-3.5%.

There are no prizes for guessing, of course, that the Tories dispute all this. They claim that the Government has shifted £100b-odd of its borrowing 'off balance sheet' and that it's only able to justify any extra by fiddling the books. They're also not at all convinced by the new forecasts for growth. We Fools wouldn't quite know what to make of it, but it looks as though things aren't going along quite as planned and we rather think we can make out the sound of goalposts being shifted. If growth continues to disappoint, cracks could begin to appear pretty quickly.

The man charged with helping Gordon out with all this, as Governor of the Bank of England, will be Mervyn King. Deputy Governor for the last five years, King will take over the main job from Sir Eddie George next June. The Chancellor noted what a great job George has done and few would disagree.

Moving onto the tax and benefits elements of today's announcement and, well, there wasn't much that hadn't already been announced. For example, the tax-free personal allowance will be held at £4,615 for 2003/04 (other rates and thresholds will be increased in line with inflation) and employees will have to pay an additional 1% of their salary in National Insurance, including any earnings above the 'upper earnings limit' of £595 per week.

It was also reiterated that from April 2003, the Children's Tax Credit will be replaced by Child Tax Credit. Likewise the Working Families' Tax Credit will be replaced by the Working Tax Credit. The name changes are all rather unnecessarily confusing of course but you can find out more details on the Tax Credits web site.

Pensions are obviously a hot topic at the moment and it was announced that the Government's Green Paper on pension reform would be released on December 17. At the same time "radical proposals" to simplify the taxation of pensions will apparently also be unleashed. The Chancellor said that he could "confirm that the tax free lump sum payment to retirees will remain" and that "existing tax reliefs for pension contributions for employees, the self-employed and employers will also remain".

From April 2003 the Basic State Pension will be £77.45 a week for single pensioners and £123.80 a week for pensioner couples. To add to the fun, the Pension Credit will be introduced from October 2003. This is designed to help those who have saved modest amounts for their retirement, who are currently penalised by means-tested benefits like the Minimum Income Guarantee. All this is designed to ensure that no single pensioner has to live on less than £102.10 a week and pensioner couples get at least £155.80 a week.

And that was about it. There was nothing overly stunning but, then again, quite often there are nasties lurking in the detailed announcements that take a day or two for the tax experts to root out. If you're a glutton for punishment then you can check out the full Pre-Budget section at the HM Treasury web site.

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