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Pre-Budget Report - Wednesday, Tuesday 9th October 2007


Pre-Budget Report 2007

Alistair Darling to the Rescue!

This is the first Pre Budget Report (PBR) to have been held in October. Of the ten PBRs since Gordon Brown introduced the event in 1997, the first six were held in November and the last four in December. The cynical among us might suggest that the date had been hurried forward in order to lay the groundwork for the election that never was ...

In fact it was more than a Pre Budget Report. Combined with the usual commentary we were privy to a Comprehensive Spending Review setting out the government's spending priorities for the next three years. Admittedly it was a broad brush vision. Alistair Darling was on his feet for barely more than 33 minutes.

The Chancellor said he would be:

"...taking no risks with stability"

"...taking no risks with unaffordable promises"

The Chancellor added that he wanted a tax system that was "competitive, simple and fair" - which raised a laugh, given his predecessor's predilection for making tax more complicated!

He didn't say he would be borrowing wholesale - not just financially but also from his political opponents but then proceeded to do so. Government borrowing this year is twice original forecasts and several of the tax measures introduced were first mooted by the Conservative party.

The measure that makes the most headlines is an immediate doubling of the inheritance tax threshold to £600,000 for married couples and civil partnerships.

Strictly speaking it's not a doubling of the threshold, more a lumping together of the two partners' individual IHT allowances. This threshold will rise to £700,000 by 2010 - effectively in line with previously announced plans to increase the individual IHT zero-rate band to £350,000.

At a stroke, the Chancellor has increased the attractions of a regularised marriage or civil partnership (depending on your preferences) rather than a less formal living arrangement. He also indefinitely backdated the measure for widows and widowers.

The other big change announced in the Pre Budget Report was a simplification of Capital Gains Tax which will see taper relief disappear in April 2008, to be replaced by a flat rate CGT of 18%. This measure is largely aimed at tackling tax loopholes exploited by the private equity industry. The Chancellor said a report on taxes for private equity would be published next month.

Among other measures:

  • Non-domiciled residents will pay a tax after spending seven years in the UK. The Chancellor said the measure would raise £650 million a year, but he ruled out a flat tax as had been proposed by the Conservatives.
  • in addition to the £150 increase announced in Budget 2007, the child element of the Child Tax Credit will increase by a further £25 per year above indexation from April 2008 and by a further £25 above indexation from April 2010 and the child maintenance disregard in the main income related benefits will increase to £20 by the end of 2008, with a further increase to £40 from April 2010.
  • The Jobseeker's Allowance and Income Support rates for 16-17 year olds from April 2008 will be brought into line with the 18-24 rates.
  • National roll-out from April 2008 of the In-Work Credit for lone parents at a rate of £40, retaining a rate of £60 in London.
  • A boost for housing include plans to spend £800 million a year on flood defences by 2010, efforts to make longer-term fixed rate mortgages more attractive and steps to increase house-building. The Chancellor said, "I want to see fixed rate mortgages for 10 years or longer
  • From April 2008 the fixed figure on which company car fuel benefit charge is based will be increased, from £14,400 to £16,900, to enhance the environmental incentive to drive fewer miles.
  • Air passenger duty will be replaced on 1 November 2009 by a new per plane duty. The Government will begin a consultation shortly with the industry to work out the details. The consultation will consider ways to make aviation duty better correlated to distance travelled and ways to encourage more planes to fly at full capacity. In the meantime, Air Passenger Duty rates will be frozen at their current rates for 2008/2009.

Economic Outlook

Inflation was forecast to be on target next year and the year after but as expected, the Chancellor lowered the government's forecasts for economic growth next year. His estimated for growth for 2007 of 3% is right in the middle of Gordon Brown's Budget 2007 range of 2.75-3.25%.

However, he cut the growth forecast for 2008 to 2.0-2.5% although held the forecast of 2.5-3.0% for 2009 unchanged. The Treasury forecasts remain among the more optimistic regarding the economic outlook for next year.

Ahead of the Pre Budget Report, the International Monetary Fund reduced its forecast for UK economic growth in 2008 to 2.3. Among others:

Barclays 2.5%
Capital Economics 2.0%
HSBC 1.8%
Lehman Brothers 1.7%
Lombard Street 1.5%
NIESR 2.2%

Public spending of £345 billion this year was forecast to rise to £397 billion by 2010. At the same time the public sector net borrowing requirement would, said the Chancellor, fall to £24 billion by 2010.

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