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• Make no bones about it, this year’s Pre-Budget Report (PBR) will have one aim and one aim only – to ensure that Gordon Brown wins a general election. We expect some fairly large tax cuts purely intended to grab the headlines and shoot the Conservatives’ fox. But, in order to head off accusations of fiscal recklessness, these will be funded mostly by low-profile tax rises elsewhere.
• The PBR will include measures unashamedly aimed at taking the wind out of the Conservatives’ sails. It is possible that the Chancellor, Alistair Darling, will match exactly the Conservatives’ pledge to cut inheritance tax and stamp duty at a total cost of £4bn. More likely, however, is that he makes his policies distinct by lowering the rate of inheritance tax from 40% to 30% or raising the £250,000 stamp duty threshold by £100,000. Together these measures would cost £2bn.
• The corporate sector is also likely to be brought on-side. One possibility is a cut in the main corporation tax rate of a further 1%, which would cost around £1.5bn. Meanwhile, slashing the rate of capital gains tax from 40% to 30% could cost the Treasury around £1bn.
• But by clawing back any tax cuts with some “worthy” and populist rises in green taxes and changes to the tax treatment of private equity, the Chancellor will aim to appear generous and fiscally responsible at the same time. Such measures could readily yield around £2bn. And he may raise more in the form of tax evasion and public sector efficiency gains.
• An alternative would be to fund any pre-election tax cuts with a further squeeze on spending. But Mr Brown will not want to go to the electorate with yet tighter spending constraints. As such, the spending envelopes announced in March’s Budget are unlikely to change. And the new departmental allocations are likely to be eye-wateringly tight even for education and health.
• If Mr Darling cannot raise enough cash to fund his headline-grabbing give away, borrowing will rise. The forecast for 2008/09 may rise from £30bn to £34bn, in part due to a downward revision to the 2008 GDP growth forecast to 2.5%. But if growth were to come in at 2% next year, as we expect, borrowing would rise further to £37bn. And growth of 1% would see borrowing shoot up to £42bn.
• Overall, the PBR will bring short-term political gain for long-term fiscal pain. This is a trade-off that Messrs Brown and Darling are willing to accept, but one that might return to haunt them.

Roger Bootle, Economic Adviser to Deloitte (Tel: 020 7823 5000)

Ends

Notes to editor:
Download the full commentary from Roger Bootle. (PDF, 95KB)

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