What can we expect from the last budget before the Election?

Financial News

Predictions have been rife over the content of the last budget, scheduled for 24th March, before the General Election.

It is likely to be Alistair Darling’s last budget as Chancellor with speculation rife that even if Labour do win another term he is likely to be replaced by Gordon Brown.

Many commentators have questioned whether the budget will be focused on the forthcoming election or alternatively, one that is “right for the country” but not necessarily full of populist measures to help labour’s reelection push.

So what can we expect in the budget?

Mr Darling gave some hint in a BBC interview, when he warned people not to expect a “giveaway” and that the budget would be “sensible” and “reflect the times in which we live”. He also confirmed that despite the commitment to halve the deficit over the next four years, the government would continue to spend to support the economy.

So apart from the usual macro economic content, how will the budget effect you? We expect to see some, if not all of the following

1. Income tax rates to remain unchanged

So close to a General Election and following the introduction of the 50% rate of tax, we are unlikely to see any changes to the rates of Income Tax in this budget. Mr Darling and his predecessor seem to prefer to rely on other methods, such as freezing allowances, known as fiscal creep, which they believe are less noticeable and headline grabbing.

2. No change to VAT

Again, this close to the Election it is unlikely that the Chancellor will raise VAT. However, it could be a target soon afterwards.

3. Corporation tax to remain unchanged

The government will want to try and bring unemployment levels down over the coming months, and leaving more money in employers’ pockets is one way to potentially create jobs. Therefore, don’t expect to see changes to corporation tax rates.

4. Capital Gains Tax

With income tax rates at 20%, 40% and 50%, having Capital Gains Tax at 18% is a glaring anomaly and it is the source of some confusion as to why the rate has not been increased in previous budgets.

We expect some changes here with a possible rise in the rate charged, however, as it has been left unchanged for this long it must be questionable whether the rate will rise.

5. Increased anti-avoidance measures

The Government and HMRC need to raise as much money as possible from a variety of sources, clamping down on anti avoidance measures would be seen as an ‘easy win’ and probably a reasonably populist measure, expect to see more of this sort of thing.

6. Further measures against non doms

In a further populist move, expect further measures against non doms, which may involve a statutory residency test amongst other possible alternatives to raise much needed income from another easy target.

7. Tax credits

Expect to see some reform on tax credits, there is unlikely to be a wholesale giveaway, but tweaks in an area that is always popular with voters.

8. Changes to help reduce unemployment

The government are rightly nervous about the relatively high rates of unemployment, especially those that have been without work for a considerable period of time. Expect measures to help encourage people back to work. However, only time will tell whether they will be enough to impact on the problem and offset the effect on employers of the National Insurance rise from April 2011.

9. Savings Tax

At a time of rising inflation and historically low interest rates, one extremely popular measure would be to reduce the tax paid on interest from savings, or even extend the amount that can be held in tax free savings products such as ISAs or certain National Savings and Investments accounts. Unfortunately this would appear to be a forlorn hope with little chance of movement in this area, meaning that savers continue to suffer negative real returns with inflation above most rates of interest.

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