Budget Briefing 2002

We have come to realise that the Chancellor of the Exchequer is not one for setting his sights low. In that respect this, his sixth Budget, was no different from those that went before. His ambitions are great, and his ability to combine support for enterprise and business with a compassionate desire to help those who are disadvantaged is something that few politicians could emulate with such conviction. The authority with which he holds the public purse strings is such that there will not be many who will deny that he is very likely to meet his challenges, at least in the short-term. Whether the success is capable of being sustained in the longer term is a much more difficult question, and the performance of the global economy and other factors beyond the control of even Mr Brown could intervene and thwart his longer-term ambitions.

Another feature of Mr Brown's style as Chancellor is the increasing extent to which the Budget speech itself is being marginalised as the forum for announcing the Government's fiscal strategy. So much is now being delivered outside the speech, either elsewhere in the political calendar or by deliberate leaks, that one wonders whether the Budget in its traditional form will survive.

Perhaps its day has already passed. The speech itself seems to be more an act of theatre than the announcement of tax changes. Tax reductions and relaxations are announced for the umpteenth time, while tax increases are glossed over with the minimum of detail.

The increased funding of the Health Service was very clearly signalled, and in recent weeks we have been "prepared" for the bad news of tax increases.

The Chancellor did, however, manage to raise the taxes to fund the additional spending with what bordered on stealth. His choice of words as to the 1% increase in National Insurance Contributions was certainly "economical", as it was only when we had the Inland Revenue Press Releases before us that we saw that the additional 1% applied to all earnings above the lower earnings limit, and was to be paid by employers, employees and the self-employed.

The significance of this move goes way beyond the additional 1% he has levied from April 2003. It signifies the end of the upper earnings limit. How can there possibly be an upper earnings limit when earnings above that figure are taxed? Having established the 1% additional charge against virtually all earnings it is surely only a matter of time before that rate starts creeping up to 2%, 3%, and beyond. Interestingly, we also find within the text of the Chancellor's speech an admission that National Insurance is indeed a tax, something continually denied by Governments across the years.

That, at least, can be seen as progress!

The proposed changes to assist and encourage small businesses are welcome, with relaxation in the burden on businesses as welcome as the actual tax reductions.

The complete exemption from corporation tax for companies with profits of less than £10,000 is a bold step, and that alone will encourage many who are currently in business as sole traders and partnerships to look at incorporating their businesses. If the regulatory burden for companies can be reduced to acceptable levels then we see a major shift towards companies, not only because of the tax advantages but also because of the benefits of limited liability that they offer. Other proposed changes, such as the abolition of stamp duty on sales of goodwill, make the incorporation route even easier to adopt.

For investors there was little of significance. The reduced rates of capital gains tax on the disposal of business assets have been confirmed, and a 10% tax rate on such gains is very attractive. It is a rate that will encourage entrepreneurs to buy and sell their businesses more frequently. They are no longer locked into businesses because of the tax costs of selling. Those with non-business assets enjoy no such benefits, and must suffer much higher tax on their gains. Over time this should successfully encourage a switch of investment into qualifying businesses as investors go in search of the lower tax rates.

A lingering concern when reflecting on the Chancellor's speech is the reliance he places upon there being continuing growth in the UK economy over the medium term.

He has made very significant commitments to fund public services, especially the Health Service, but is also committed to substantial spending in support of the family and those who struggle to secure work. These commitments need to be funded, and the tax revenues to do so require a buoyant economy. We have seen over the last year that the global economy can be fragile, and if those tax revenues fail to materialise, whether due to problems within our own economy or through the impact of global events, the impact on the public finances could be substantial. In those circumstances one can well see the 1% additional National Insurance costs referred to above escalate very rapidly indeed to meet the shortfall. The Chancellor has not yet had the challenge of managing an ailing economy, and we have yet to learn how he would treat the ailment. Let us hope it is some time before any medication is required!

Finally, there is the tantalising question as to the Government's intentions as regards the Euro. Is the Chancellor building a long-term strategy for the UK and its pound, or a much shorter-term strategy to deliver Britain into the Euro?

If it is the latter then much of his fiscal strategy will become subject to the scrutiny of Brussels, and who knows where that road might lead?!