The Chancellor yesterday revealed the Pre-Budget Report he hopes will pull the UK from the economic mire. LINDSAY McINTOSH looks at the proposals
Public spendingA TOTAL of £3 billion of capital spending is to be brought forward for schools, roads, housing and energy-efficiency measures. This works by providing employment and helping the struggling construction industry.
Under current Treasury rules, the government is allowed to borrow to invest without breaking its fiscal limits.
Among the projects being brought forward, from 2011, are motorway-widening schemes and improving and building social housing. The government is to invest £535 million more quickly on energy efficiency, rail transport, and environmental protection.
This will mean heating and insulation for homes, better flood defences and 200 new trains. Mr Darling said this was "vital for the future prosperity of the country and supporting jobs in key industries".
VATVALUE Added Tax (VAT) has been cut from 17.5 per cent to 15 per cent as part of the £20 billion "fiscal stimulus" package to encourage spending and spur economic growth. The reduced rate will operate from Monday for 13 months.
It is the equivalent, for the average household, of £275 a year. It is intended to get consumers back to stores they have been vacating in their droves. However, critics say it is not large enough to make a difference.
Stephen Robertson, the director-general of the British Retail Consortium, said: "This is a modest but welcome boost."
But he also warned: "Implementing a new VAT rate in just a week will be exceptionally difficult for customers and retailers at their busiest time of year."
Income taxINCOME tax on the highest-earners – those who make at least £150,000 a year – will be raised to 45 per cent. The new tax band will come in from April 2011. By announcing a deferred tax rise, the Chancellor is attempting to outline how he will make up the borrowing he is doing now.
The deferral of any increases in income tax until after the next election will mean they will not be introduced unless they are endorsed by voters. The new tax band will be paid by about 400,000 earners.
This year's increase in the personal allowance of £120 a year for basic-rate taxpayers will be made permanent and increased to £145 in April, helping 22 million basic-rate taxpayers. From April 2010, those with incomes between £100,000 and £140,000 will see the value of their personal allowance reduced.
National insuranceALL rates of National Insurance contributions – whether by businesses or individuals – are to rise by 0.5 per cent from April 2011, but the starting point for the levy is to be aligned with that of Income Tax. No one on a salary under £20,000 will make any more contributions as a result.
The Treasury said it chose the 2011 target because, by then, it expected economic growth to be "above trend rates" and real incomes to be growing strongly.
But David Frost, director general of the British Chamber of Commerce, said: "The proposal is wrong. At the very time when the economy should be coming out of the recession, businesses will face an extra tax on employing people. This is not the way to reduce unemployment."
DutyTHE VAT cut is to be partially offset by increases in duty on petrol, alcohol and tobacco. Mr Darling said that the increase in fuel duty would wipe out the recent drop in petrol prices. He said the cut across all three would be "by an amount which should keep the overall cost to consumers the same this year".
The areas are targeted because the government can justify attempting to keep them under control. But the move predictably angered consumer groups who campaign for the industries and consumers. They accused the Chancellor of "giving with one hand and taking away with the other".
Edmund King, AA president, said: "By increasing fuel duty while reducing VAT shows that the Chancellor is playing roulette with global fuel prices and could lose his gamble. It is a very big gamble as there are 32 million motorists out there and most of them have a vote. If the global price of oil increases this hike may come back to haunt the government."
EnvironmentALISTAIR Darling, right, indicated that he was not prepared to sacrifice the environment to save the economy. He announced measures including £100 million, on top of £50 million to be brought forward, to help insulate homes.
If energy companies do not take steps to close gaps in prices paid by customers on different payment schemes, the government will take action. And the regulator, Ofgem, will be monitoring price changes to ensure wholesale prices are passed on promptly.
The obligation to produce renewables will be extended and the air passenger duty is to be reformed into a system based on distance travelled. But environmental groups accused the Chancellor of blowing a chance to deliver a Green New Deal.
MortgagesA NEW body is to be set up, bringing together lenders, the government, trade bodies, consumer groups, regulators and the Bank of England to monitor lending levels and practices by banks.
Major mortgage lenders have agreed to wait at least three months after a borrower falls into arrears before seeking repossession.
The scheme which covers mortgage interest payments for those who have lost their jobs is to be extended. And the Mortgage Rescue Scheme, which helps vulnerable homeowners facing difficulties to stay in their home, is to be extended to cover those with second mortgages.
Together, this provides help worth £200 million.
The Chancellor also welcomed Sir James Crosby's report on finance in mortgage markets, which recommends the government guarantees securities backed by new mortgages. He said he would look at such a scheme.
JobsA £1.3 billion package to help the growing number of unemployed was announced, including an expansion of a "rapid response" service to advise on vacancies and careers. It will now include all redundancies, not just those at the largest workplaces. Money will also be given to help retrain workers facing redundancy through a Train to Gain initiative. Local Employment Partnerships, under which firms work closely with local Jobcentres to fill job vacancies, will be expanded to include the short term unemployed as well as those who have been out of work for long periods. Paul Kenny, the general secretary of the GMB union, welcomed the announcements, adding: "People need to wake up to understand that the UK must either invest to keep people in work or spend money on unemployment."
Other measuresFROM 2010, up to eight million people on low incomes who put money into a new "Saving Gateway" will get 50p added from the government for every pound they save. It will be widely available through banks, building societies, credit unions and the Post Office.
The pension credit will rise in April from £124 to £130 a week – and from £189 to £198 for pensioner couples. The basic state pension will go up from £90.70 to £95.25 a week. A rise in the child tax credit of £50 above indexation has already been announced for April, and Mr Darling said a further increase of £25 above indexation, scheduled for 2010, would be brought forward to April. It is worth, in total, £2,235 for families on a modest income.
The government is also working with local authorities to further improve take up of tax credits and benefits, but both Age Concern and Save the Children said the Chancellor's measures did not go far enough.
Car taxEXTRA rates of car tax will be phased in more slowly and increases will be lower than previously planned. In 2009, the number of vehicle excise duty rates will increase to 13, but the cost for all cars will increase by only a maximum of £5.
From 2010, the maximum increase for the most-polluting cars will be £30, instead of £90, with less-polluting cars seeing no increase or a cut of up to £30.
Cars that emit more than 225gm of carbon dioxide per kilometre but were registered between 1 March, 2001, and 23 March, 2006, will be moved into the new VED band K in 2009 and stay there in 2010. This will mean that they maintain their exemption from the top rate of VED.
Edmund King, of the AA, said: "Gordon's short-term tonic for motorists, whilst welcome, is not enough to bring the fizz back to the used and new car market."
BusinessSMEs will share in a £7 billion package which includes access to loans and deferring tax rises. Firms will be allowed to spread tax payments, including VAT and national insurance "for as long as they need".
A £4 billion deal has been made with the European Investment Bank to provide money to UK banks to pass on to SMEs. About £1 billion will be available to their customers by the end of the year and credit will also be offered through a temporary Small Business Finance Scheme, worth another £1 billion.
Russell Hills, head of tax for KPMG in Scotland, said the tax deferral measures were "effectively a government loan that hopes that by giving them more time to pay their bills, they will be able to continue trading and pay in the longer term".
THE PRE-BUDGET REPORT: FULL COVERAGE
