SPECIALS
Budget 2001: Happy Families

By The Fool News Team
March 7, 2001

Family Tax Credits

If you're planning to start a family then Gordon Brown is on your side. Maternity pay will rise to £75 a week in 2002 and £100 a week the following year. Statutory leave you may take will increase by 8 weeks to 26 weeks from 2003. Fathers can get in on the act as well, with two weeks' paternity leave introduced for the first time.

If you already have a child then you stand to benefit as well, as long as you or your partner are at work. The working families tax credit will rise this June by £5 a week. In addition a new children's tax credit will be introduced worth £10 a week, £1.50 higher than previously proposed. For the first year of a child's life this credit will go up to £20 a week. This all applies only to families earning less than £50,000 a year.

Finally childcare tax credit will rise to £135 a week for one child, or £200 for two or more, paying as much as 70% of care costs. However, all these schemes require plenty of paperwork. Whether all those who qualify will end up benefiting from these schemes remain to be seen.

ISAs and Pensions

There was nothing new on ISAs. The Chancellor announced that there is now a total of £48b saved in them and confirmed that the £7,000 annual savings limit will remain for a further 5 years.

When Gordon arrived at pensions, we waited with bated breath for some dilution of the requirement to buy an annuity by the age of 75. Sadly it was not forthcoming. There was some good news on pensions, though, and that is that the Government has accepted the findings of the Myners Report on pensions, published yesterday.

This means that the Minimum Funding Requirement (MFR), which forces pension funds to maintain relatively high levels of low-risk assets like gilts, will be abolished. On top of this, it will be made easier for pension funds and life assurers to invest in venture capital assets and there will be more powers for pension fund trustees. The extra flexibility should enable pension funds to improve long-term performance.

The Basic Taxes

The following items relating to income, capital gains and inheritance taxes were announced in the Budget speech but, as always, the fine print of the Budget document may contain some hidden nasties or even pleasant surprises.

The 10% income tax band was extended from £1520 to £1880 meaning a tax saving of £43 per year. On capital gains tax the reduction in long-term rates to 10% was extended to employees who have shares in non-trading companies such as property and investment firms. The inheritance tax threshold was raised from £234,000 to £242,000 and this means that only 4% of estates are expected to be liable for inheritance tax.

Unfortunately, despite the Stamp Out Stamp Duty campaign, there was no mention of any changes to the 0.5% stamp duty rate charged on share purchases.

"Sin Taxes"

Sinners did well in this budget. No increase in taxes on alcoholic drinks at all and only a 6p rise on the price of a packet of cigarettes. That increase is only the amount required to keep up with inflation. Gamblers will benefit by the abolition of the betting levy, a move driven by the rise in gamblers using the Internet to access offshore locations.

Fuel duty

Driving a car is not really a sin, although many seem to think that. However, there are limits to the motoring public's tolerance, as we saw last autumn. Reflecting that, the Government has extended the £55 rebate on small cars to those of up to 1,500 cc. It had already decided to abolish the petrol escalator and has cut a further 2p a litre off ultra-low sulphur petrol, in addition to the 1p cut already announced. But as no one sells this magic stuff the Chancellor is taking 2p a litre off unleaded petrol until June 14th when everyone will have it, or so he says, and also 2p off lead replacement petrol. The situation with diesel is less complex. A straight 3p comes off the ultra-low sulphur version.

Economic Round-up

The Chancellor of the Exchequer painted a picture of a country in rude economic health when delivering his budget this afternoon. Gordon Brown said the economy grew 3% in 2000. Further, he forecast GDP would increase by between 2.25% and 2.75% this year. This is a pretty wide estimate, but at least better than many feared from looking at the US economy.

Inflation averaged 2.1% in 2000, below the Government's target of 2.5%. Nevertheless Gordon Brown continued to set the same target for the coming year. Eddie George will have to take this into account when setting interest rates. At the moment the Bank of England's monetary policy committee is meeting and announces its decision tomorrow.

Rates may well be cut from their present level of 5.75%. This is because the Chancellor did not unleash a whole range of tax cuts, sticking to the extension of the basic rate tax band. This means taxpayers won't feel encouraged to spend that profligately.

Overall Gordon Brown lived up to his stable image. With his £23b budget surplus he has chosen to reduce the level of national debt, by £16.4b alone this year. Remember, though, that this comes mainly from the windfall he received from auctioning off 3G licences last April.

He has no plans to increase Government borrowing, so this will push up the prices of the few outstanding gilts. In the long run then yields on these debts will be lower and long-term interest rates look set to fall. This should push people towards investing in shares.

Budget Speech in full - Part 1, Part 2, Part 3, Part 4, Part 5 
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