Ahead of the Budget, we sat down with PA strategist, Fiona Holroyde, to get her take on what to expect on October 30.
When Rachel Reeves delivers her long-awaited first Budget, 118 days after Labour came to power, she will be making history as the first female Chancellor although she is not the first to face the difficulty of balancing manifesto commitments with the economic reality. For all new Chancellors, their first Budget is critical in terms of reassuring the markets and maintaining credibility. Arguably, the political reality for Rachel Reeves is easier than for many of her predecessors, the Government’s majority gives her more scope for reform and unpopular decisions than many Chancellors in recent times. More importantly, she needs to maintain the confidence of the markets and there will be concern if there are significant increases in Government borrowing and a re-writing of the fiscal rules.
There is always speculation in the run up to the Budget, but this year has seen significantly more ‘off the record’ briefings and leaks with details about possible plans and changes to manifesto commitments. For example, ‘well sourced’ pieces suggest some policy commitments will be watered down or exemptions introduced, eg. military families being exempt from the introduction of 20% VAT on private school fees.
Invest, invest, invest is the Chancellor’s mantra and she and the Prime Minister sought to reassure business at the Investment Summit on Monday 14th October. With the Prime Minister pledging to ‘rip up’ regulations and get rid of bureaucracy and the publication of its industrial strategy green paper the signals were clear – a commitment to stability and future growth. And yet the summit was held against a backdrop of increasing concern amongst many in the business community about measures expected to be in the Budget such as significant increases in Capital Gains Tax, rises in employer national insurance contributions and changes to non-dom status.
There has been some speculation that there could be a windfall tax on the banks or an increase in the banking surcharge. Both the Chancellor and Prime Minister have ruled out changes and seem unlikely given such a high-profile u-turn would be risky and clearly undermine the reassurances given at the Investment Summit.
Several high profile measures that will impact business were flagship policies in the Labour manifesto, they included extending the windfall tax on energy companies; reforming the taxation of carried interest, which the Treasury has already consulted on, and replacing the non-dom regime with a Foreign Income and Gains relief, again which has already been consulted on. Clearly these are priority commitments, and we can expect further details in the budget.
Following comments made by both the Chancellor and Prime Minister, there are very strong signals that the level of employers’ national insurance will be increased. Either through the introduction of national insurance on employee pension contributions or alternatively increasing the rate at which employers pay national insurance on employees’ earnings. Whilst there is heated discussion amongst commentators as to whether these options break a manifesto commitment, both the Chancellor and Prime Minister have made clear that in their view, they don’t.
Capital Gains tax is an area that the Chancellor is known to be looking at. Politically, changes to CGT play well on the Labour backbenches – CGT is seen as impacting ‘wealthier’ second homeowners or small investors. In reality CGT increases also have a very significant impact on entrepreneurs, larger investors and critically private landlords and will undermine Government messaging about encouraging investment. According to modelling by HMT, leaked to the Guardian, looking at projected income a rise to 33% would only raise £1bn. Increasing CGT to 39% would in fact cost the Treasury. The question is not if CGT will be increased but by how much.
Pensions is another area where changes are expected, although Labour pledged to keep the triple lock on the state pension, it did not commit to triple lock plus – protecting the state pension from income tax. Other measures that could be included are reducing tax relief on pensions, reducing the maximum amount savers can withdraw tax free at 55 and adding inheritance tax to pension pots. Pension changes are notoriously complicated and although there is an opportunity for the Chancellor to be more radical, she will be mindful about the impact on public sector pensions.
Inheritance Tax changes are relatively easy and politically palatable and potentially lucrative for the Chancellor. With less than 5% of the population paying inheritance tax and with other measures ruled out changes seem inevitable. Many experts believe that the Chancellor will announce that the defined contribution pension pots will be included as part of IHT. There is also speculation that a new banding system for IHT will be introduced including a new higher rate of 45% and reforms focused on both business and agricultural reliefs.
Reforming the planning system, investing in infrastructure and building more houses is at the heart of the Government’s investment agenda. The Planning Reform Bill is already progressing through Parliament but further announcements on a range of housing issues are expected. There is some speculation that council tax will be reformed with a new flat rate introduced. Labour made clear it would reduce the first-time buyers’ stamp duty threshold back down to £300,000, however reforming the Lifetime ISA scheme and increasing the current £450,000 threshold would be one way of demonstrating support for first time buyers. There has been no further mention or information on the Freedom to Buy Scheme so people will be expecting more details to be included.
Insurance Premium Tax (IPT) could also be increased. The standard rate is currently 12% and has been very successful, generating more in revenue than inheritance tax. Many argue that it has made insurance too expensive for lots of households, who still feel the pressures of the cost-of-living crisis. One option would be to increase the higher rate of IPT which primarily covers travel insurance.
Other manifesto commitments that we expect to be part of the Budget package include, a business tax roadmap with aim of providing greater transparency and certainty and a new Growth and Skills levy replacing the apprenticeship levy as well as some reference to reforming business rates, which will most likely be a new consultation.
Tightropes, balancing acts, battles have all been used to describe the new Chancellor’s first budget. There is no doubt she has difficult decisions to make, the real challenge is to ensure there are no unexpected surprises and the markets remain confident.
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