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The difficult task of predicting an unpredictable Budget

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A new chancellor, only recently appointed, leaves the outlook for the 11 March Budget highly uncertain. An announcement on substantial extra infrastructure and abolition of entrepreneurs’ relief are regarded as near certainties, but the other measures that will find their way into Rishi Sunak’s first Budget are far from easy to predict.

It is always tricky writing pieces like this ahead of a Budget, but particularly tricky this year. We have a new chancellor, appointed at a time when the Treasury is usually in the Budget home straight, following Sajid Javid’s surprise resignation last month. Not only do we have a new chancellor who we know very little about, Rishi Sunak, but we do not know precisely whose hands will be on the tiller. Will this be a Budget mainly made in 10 or 11 Downing Street?

That is not the only difficulty. The coronavirus Covid-19 outbreak has had a big negative effect on the Chinese economy, according to surveys of economic activity there, and it will have an impact on the rest of the world, including the UK, through supply chains and confidence effects. We have seen global stock markets take fright and the expectation must be that the Office for Budget Responsibility forecast which provides the economic and fiscal backdrop to the Budget will be a downbeat one. The government may also want to keep something in reserve in case emergency economic measures are needed to cope with the crisis.

Under Javid, at least, we thought we knew where we stood. The centrepiece of his Budget was to be a big increase in infrastructure spending, £100bn over five years, coupled with some modest tax increases and a bit more day to day spending, beyond the announcements that the government has already made on increased National Health Service and schools’ spending.

Even that expectation was called into question, however, when the former chancellor revealed, in an interview with The Times that in the Budget he never got to deliver he wanted to cut the basic rate of income tax from 20% to 18%, with a new target of reducing it to 15%. He also said he planned an increase in capital allowances to spur business investment and a reduction in stamp duty.

The reaction to Javid’s bombshell was one of puzzlement in Whitehall and Westminster, for if these were his plans, he had kept them very close to his chest.

The plans also seemed odd in other respects. Apart from a vague plan to cut government waste, these were uncosted ideas from a politician who used his resignation speech in the House of Commons to caution against any departure from the fiscal rules. Not only that but there is a reason that cutting the basic rate of income tax has gone out of fashion. With an income tax allowance of £12,500, the gains from such a move are firmly tilted towards the better off. They might find favour in the Tory party, who yearn for a return to the tax cuts of the 1980s, but they sit uneasily alongside the government’s levelling-up agenda. A tax cut that benefits more prosperous taxpayers in the south is not an obvious way to reward northern voters.

It is hard to say whether the words ‘spoiler alert’ should have been attached on Javid’s revelations, or whether he was just trying to make Tory supporters wistful for what might have been. The reaction from the Treasury and Downing Street, that the only tax plans they heard from Javid were about raising taxes, not eye-catching cuts, suggests that the Sunak Budget will be rather different from that outlined by Javid, but we will have to wait until 11 March to know for sure.

One thing that both the former and current chancellor appear to have agreed on is a tax increase in the form of abolishing entrepreneurs’ relief, which cost £2.7bn in the latest full year for which data is available, 2017/18. The relief, which reduces CGT on sales of business assets from 20% to 10%, subject to a limit, has become a popular tax planning tool.

That is why the Treasury, in common with think tanks like the Resolution Foundation, do not like it much. The Foundation says there is no good evidence that it has spurred entrepreneurial activity, because those establishing businesses are not driven by future tax concessions. For the Treasury, it looks like an expensive way of rewarding a relatively small number of people and, unchecked, the cost will grow.

So, it looks as if it is in for the chop, despite objections from business groups; the main question being whether there will be immediate abolition or a phased removal. Taken together with the government’s decision to cancel the planned and costed reduction in corporation tax from 19% to 17% in April, other measures may be needed, perhaps those enhanced capital allowances, to convince business that the current administration is on its side.

How are the numbers looking in the run-up to the Budget? We now have data for the public finances for the first ten months of the current fiscal year. They show that the rolling total for public sector net borrowing was £44.8bn, £5.8bn up on the corresponding period of 2018/19. That sounds bad, though analysts expect the full-year borrowing total to come in marginally below the OBR’s forecast of £47.6bn. Even so, borrowing is above the very low numbers we had become accustomed to a year or so ago.

So, where does that leave us for the Budget? The Treasury has begun to point out that it has more than one fiscal event this year, including a spending review in the summer and another Budget in November, reverting to what is regarded as the normal timetable. That suggests that 11 March, while setting the tone for this government with a large dollop of additional infrastructure spending and other measures that speak to its ‘levelling up’ agenda, may not be the all-singing, all-dancing event that some were expecting. But predictions, as I say, are more uncertain than usual. This is an unpredictable time, and we have an unpredictable government.