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Spending cuts and other predictions for the 2009 Budget

When Alistair Darling stands up in the House of Commons on 22 April, he will be delivering his Budget speech against the backdrop of one of the worst post-war recessions, if not the worst.

With billions already having been poured into rescuing the banks and billions more spent by the Bank of England buying up toxic bonds and debt, the Chancellor will be keen to be seen taking steps that address the long-term issue of balancing the government’s books. This will mean either a rise in the tax-take or a cut in public spending or both.

So what are the predictions for the Budget 2009?

The economy

It is widely expected that Mr Darling, faced with a government borrowing deficit estimated to reach £160 billion (up from the predicted £118 billion) this financial year and £167 billion next, some 12 per cent of national income, will announce public spending cuts to the tune of £15 billion, to be achieved through yet further efficiency drives.

In last autumn’s pre-Budget report, Mr Darling said that the UK economy would shrink by between 0.75 per cent and 1.25 per cent during 2009. These figures now look far too optimistic, and he may revise his forecast to a slump in growth of between 3 per cent and 3.5 per cent, making this the most severe recession since 1945.

Future growth for 2010, when the economy is expected to begin its slow recovery, is likely to be forecast at 1.5 to 2 per cent.

Taxes

One way of coping with the massive budget deficit will be to raise government income through higher tax charges.

The pre-Budget report has already indicated that higher earners on £100,000 a year will get lower personal income tax allowances (it is to be reduced by half); those on £140,000 per year will lose it altogether. For earners above £150,000, there will be a new 45 per cent tax rate.

Following recent changes to capital gains tax (the introduction of a flat rate of 18 per cent) and inheritance tax (the transfer of reliefs between married couples and civil partners), it is unlikely he will wish to make any more changes to the system here.

Also set out in the pre-Budget report was the proposed increase of 0.5 per cent in both employee and employer National Insurance contributions, due to take effect in April 2011.

The standard rate of VAT is due to rise to its old rate of 17.5 per cent on 31 December, although the Chancellor may signal an intention to push the rate higher still in the coming years.

Mr Darling may look at slicing a little off the rate at which larger firms pay corporation tax, a measure that could be funded by reductions in other reliefs such as capital allowances.

Tax changes could be introduced to help and encourage savers, although the government would like to see consumers spending more rather than saving more at the moment. The government has been urged to drop the 20 per cent tax on the interest that accrues from savings.

Other measures aimed at helping individuals could also include a raising of the threshold at which pensioners pay income tax and lifting the £3,600 ceiling on how much can be put into a tax-free cash ISA.

The point at which stamp duty becomes payable on a house purchase was raised from £125,000 to £175,000 in the last Budget, and the Chancellor may be tempted to extend the temporary increase in order to help boost the housing market.

Pensions

There have been reports in the press that the Treasury may want to introduce a reform of the tax relief system for pensions.

Possibly under threat is the full tax relief that is given to pension contributions from top-rate taxpayers.

Mr Darling may leave any decision until right before the Budget announcement. One option for him could be to scrap the right of top-rate taxpayers to offset their 40 per cent tax liability against the funds they add to their pension schemes. However, limiting relief to just the basic 20 per cent tax rate could hit lower earners, and the boost to the government’s coffers (as much as £5 billion) may be judged not to be worth the loss of political capital that may entail.

Businesses

Mr Darling has already introduced a number of schemes aimed at encouraging banks to free up more credit for businesses.

The Budget may well see further measures aimed at shoring up businesses struggling to cope with the recession.

One such plan could be the implementation of a car scrappage scheme under which people would receive £2,000 when they trade their old car in for a new model.

It is also thought that the Treasury is contemplating plans to help smaller firms deal with the problems of credit risk.

A state guarantee scheme could be set up to support businesses that are struggling to get the credit insurance that would safeguard them against the risks of not being paid.

The guarantees will be offered to firms whose insurance cover has been reduced but not entirely withdrawn.

Ministers have been declaring the 2009 Budget as a budget for jobs (unemployment could be threatening the 3 million barrier by the end if the year), and it will probably include £2 billion of help for those out of work; people aged under 25 who have been unemployed for a year will be guaranteed a job, work experience or training.

There is also likely to be a £500 million support package for businesses involved in green sectors such as renewable energy.

Also believed to be hovering near the agenda is a temporary increase in the £50,000 annual investment allowance, which lets businesses write off the cost of qualifying expenditure against their taxable profits.

Homeowners

The Chancellor may well use the Budget to set out details of support for the housing market. The Treasury could be about to provide £50 billion worth of guarantees to underwrite new mortgage-backed assets. In principle, the government has already agreed with proposals from the Crosby review to shore up mortgage lending through a guarantee scheme.