Budget day this year is just two days before Halloween, and given his limited room for manoeuvre, Philip Hammond is looking likely to come out as the ‘Budget Bogeyman’, with a precious few treats to sweeten what looks to be a lot of tax-raising tricks.
I doubt even this week’s news that public borrowing is on track to hit its lowest level in 16 years, down nearly a billion pounds since this time last year, will give him much comfort after Theresa May’s pledge of £20 billion a year more for the NHS and promise of no increase in fuel duty. All that and an end to austerity!
So where will the Chancellor find all this extra money?
Mr Hammond knows that, despite the polls, the current government needs all the friends it can get, and with Brexit still a long way from a done deal, he knows getting this Budget waved through will be no easy task for a minority government with truculent ‘friends’ to both right and left.
So I’ll go out on a limb and predict next Monday’s Budget will not be exciting, although he will do everything he can to make it feel like a 'prudent give away.'
The Chancellor’s best cause could be to call in sick and put the whole thing off until April, but I suspect the CBI might not applaud that message to Britain’s workers either!
And so, he has to say something…
Often seen as a soft target by the Treasury, pensions could play a starring role in funding the black hole left by the Government’s pledge to help the NHS. A complete overhaul, like chopping pension tax relief altogether, would be way too bold given Brexit uncertainty and the political fall-out of yet another U-turn. However, cutting higher-rate relief and tinkering with the annual and lifetime allowances is firmly on the agenda. I think the temptation could be too much.
But there’s danger here. Any cuts or increased complexity, risk sending the wrong signal, scaring savers – especially younger ones - and unravelling the generally good work done by automatic enrolment. Does the government want us to save or not?
- Income tax U-turn
Could the Chancellor break a manifesto pledge next Monday? Yes, he certainly could.
The government stood on a promise of an income tax cut in the form of an increase to the tax-free personal allowance. This has been raised in successive Budgets, effectively reducing the amount of tax we all pay. The target is now to raise it from £11,850 now to £12,500 by 2020, but the very significant sums he could raise by delaying any rise would help the Chancellor with the NHS and Universal Credit. This could equally be passed up the scale with freezes on higher and highest rate allowances.
With the excuse of the NHS as a beneficiary I think he might get away with it, without there being too much blood on the streets.
- Capital gains tax
Few chancellors have been able to resist the temptation of tampering with capital gains tax. The rate of CGT has never been so low – 18-28% for gains on residential property assets (although you do not usually pay tax when you sell your residence), and 10-20% on gains from other assets depending on your income tax status and the size of the gain. Taxpayers currently enjoy an annual exempt amount of £11,700.
It would be an easy win for the Chancellor to bring CGT rates in line with inheritance tax, which could mean CGT charges of up to 40% for higher earners.
Why wouldn’t he do it? Well, as the tax is not applied on gains made from the sale of people’s main homes, CGT is not a huge source of revenue for the Treasury. I think Mr Hammond's need for large sums and his desire to not alienate too many of the Conservative’s core voters may mean this relative minnow is spared.
Easing the regulations to make building affordable housing would be a logical start, but what many want the Chancellor to do is conjure up extra money. I think he’ll do it, despite all the other calls on his cash. But I suspect his innate caution will mean he’ll please no-one, offering more but not enough.
So not exciting, but not unimportant either. And with the Institute of Economic Affairs claiming the tax burden is the highest for 40 years, it seems we’re going to have to look elsewhere than Mr Hammond for any cheer. Don’t worry, it will soon be Christmas…