TAX NEWS - June 2010

UK Tax: Tax reforming Budget

I've taken a fairly close interest in around 30 Budgets. I've also spoken to others who've worked on or observed 40 or 50 of them. And all of us reckon that today's Budget will be pretty unusual, in that it will combine big changes to the path of public spending with sweeping tax reforms.

There have been many big Budgets in the post-war era. Within my living memory, there've been the important crisis Budgets in response to recessions in the mid 1970s, early 1980s, and early 1990s.

There have been tax-reforming Budgets such as Nigel Lawson's in the mid 1980s and Geoffrey Howe's 1979 one, shortly after Margaret Thatcher was elected, which shifted the burden of taxation from direct taxes to indirect taxes.

And there was the 2002 Budget that increased National Insurance and confirmed that the UK was on a path of steeply rising public expenditure.

It is however rare for a Budget to contain both an overhaul of the taxation system and a significant shift in the boundary between public sector and private sector.

Stephanie Flanders, as economics editor, will guide you through this brave new fiscal world after it's unveiled.

And if I look at the areas that are of most concern to me as business editor, I am expecting big stuff.

There will be details about a new tax on the liabilities of banks to raise billions of pounds a year.

There will be an increase in the rate of capital gains tax - with much of my interest being focused on how the pain for entrepreneurs is kept to a minimum.

There will be moves towards a simpler corporation tax system: falls in the headline rates will be financed by the abolition of certain allowances for businesses. And in this case I'll be keen to see if the Chancellor, George Osborne, has found a way to allay the anxieties of manufacturers that their net tax burden would increase.

I'll also be looking out for evidence that Mr Osborne is translating into deeds the concerns he raised in opposition about what he perceived as the unhealthy structure of the British economy.

So, for example, he argued that economic growth in the boom years from 1992 to 2007 was too dependent on consumer spending and rising levels of household and business debt (or leverage).

In opposition, he floated the idea he might limit the tax deductibility of interest for businesses, to reduce the advantage of financing investment and growth with debt. Will he today initiate a study of how to do that?

And if he still wants to rebalance the economy away from consumer spending, he could have a reason for pushing up the VAT rate that would be - in his terms - a little more principled than his burning need for more wonga to reduce public-sector borrowing.

The retail and consumer sector would, of course, go "ouch".

Separate and related to all that, Osborne has argued that we all need to save more. Will there be any new incentives to save for a pension, for example? And what has happened to the Tory pledge to restore the tax advantages of pension funds which were removed by the last government?

Of course I'll also be looking to see how the new lower path for public expenditure interacts with and affects growth forecasts - and at whether investors and the notorious credit rating agencies will see the British state as better or worse positioned to pay its debts.

Finally there's the important issue of unexpected consequences - and it would be extraordinary if there were none of those.

To repeat, this will be a huge Budget, put together in a hurry, and in the unusual circumstances of marrying the hopes and ambitions of two parties, the Tories and Liberal Democrats.

Seen in that way, it is both unique and quite risky. There must be a fair old probability that it will contain a measure whose effect will be precisely the opposite of that intended.

What springs to mind was Nigel Lawson's decision as chancellor in 1988 to defer new limitations on who could claim tax relief on mortgage interest, which sparked off the mother of all unsustainable house-price booms.

I only hope that late nights and early mornings at the Treasury haven't allowed a howler of that sort to slip into that red box.