Budget 2006 - Brown takes another step towards No.10
Having communicated most of the bad economic news in last December's pre- Budget report, there were few surprises in Gordon Brown's 10th, and possibly last, Budget.
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Key points Economic growth will be pitched at between 2% and 2.5% this year, rising to between 2.75% and 3.25% in both 2007 and 2008 - in line with the projections contained in the 2005 pre-Budget report.
Public borrowing will be £2 billion higher than previously forecast at £36 billion for 2006/07, although it is predicted to fall back to £30 billion in 2007/08, and to £25 billion in 2008/09.
Inflation, on the government's preferred measure - the consumer prices index - will remain close to the 2% target.
Pay settlements in the public sector will face a continued squeeze, with deals set to average just 2.25%.
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In a speech variously described as "boring", "relaxed", "solid", "confident" and, at times, even "humorous", the chancellor of the exchequer delivered his 10th Budget to the House of Commons on 22 March 20061 (See box 2 for more reactions). Despite hundreds of pages of documentation, there were few surprises in the chancellor's red briefcase. Indeed, many of the main announcements, together with the government's projections for economic growth and public spending, had previously been trailed in the 2005 pre-Budget report (See Pre-Budget report 2005: growth down and borrowing up ).
Such was the lack of genuinely new announcements that many commentators were left pondering whether there was any need for a Budget at all. Anatole Kaletsky of The Times suggested that Gordon Brown's performance was "a ritual more about political theatre than economic substance". He said the fact that decisions on monetary policy have long since been handed over to the Bank of England, and the current state of public finances, meant that, while there was no pressing need to raise taxes, neither was there much scope for large increases in expenditure, nor extravagant "giveaways". It is hard to argue with his analysis. The Financial Times said the oration, which lasted just over an hour, was "not so much a Budget, more a lengthy application for the job of prime minister".
But perhaps the most remarkable aspect of the 2006 Budget was those areas that were not mentioned in Brown's speech, notably the NHS - a striking omission as it accounts for almost one-fifth of all public spending. Nor was there any mention of what the government proposes to do about the continuing pensions crisis, described by DeAnne Julius, a former member of the Bank of England's Monetary Policy Committee, as "the unmentioned elephant in the room". The chancellor might, she speculated, be leaving that particular problem for his successor.
UK growth remains positive
The chancellor's projections for the UK economy suggest growth will be pitched at between 2% and 2.5% in 2006, rising to between 2.75% and 3.25% in both 2007 and 2008 - unchanged on the forecasts contained in the 2005 pre-Budget report. However, the Treasury now expects business investment to grow by between 1% and 1.5% this year "as firms have continued to adopt a cautious approach to stepping up capital spending, despite healthy profitability". Just three months ago, it was predicting that business investment would expand by between 3% and 3.5% during the course of 2006. Fortunately for the chancellor, this disappointing projected downturn in investment is offset by a projected increase in both household and government spending, leaving the overall growth forecast unchanged.
Public borrowing, predicted at the time of the 2005 pre-Budget report to be £34 billion for 2006/07, is now projected to be £2 billion higher, at £36 billion, falling to £30 billion in 200 7/08 and £25 billion in 2008/09. Similarly, the budget deficit is likely to be higher in 2006/07 - at £11.4 billion - than originally forecast just three months ago.
The Treasury's figures show that Brown's "golden rule" - which maintains that the government should balance its budget over the economic cycle, excluding net capital investment - remains unbroken. Not that this impresses many analysts. The Financial Times noted that this tenet of financial rectitude has become "so tarnished in the eyes of most economists" that many believe it is malleable to the point where "the chancellor will always change it to ensure the public finances pass the test, rather than making tough decisions on taxes or spending to meet it." Each time the chancellor has come close to breaching the golden rule, the goalposts are moved, it adds somewhat caustically.
On the prices front, the government's preferred measure of inflation - the consumer prices index (CPI), which excludes certain items such as council tax, mortgage interest payments and buildings insurance - is expected to remain close to the 2% target for the rest of this year, and beyond. The Treasury predicts that the CPI will move marginally below target in the coming months, but it will then edge upwards as higher oil and wholesale gas prices continue to feed through to household utility bills. Although rising energy costs are expected to exert a slightly higher upward pressure on inflation in 2006 than the Treasury previously thought, this is predicted to have only a temporary effect on CPI inflation.
So what do the City analysts make of the chancellor's latest sums? Oxford Economic Forecasting (OEF) agrees with the general consensus that the Budget contained few surprises, notably because Brown managed to "get most of the bad news out of the way in the revisions he made to his forecasts in last December's pre-Budget report". Although the chancellor revised his borrowing forecast for 2006/0 7, rightly in the opinion of OEF, he still "remains over-optimistic about revenues, and his ability to control public spending, in the medium term", it says.
The verdict from National Institute for Economic and Social Research (NIESR) was not much kinder. It maintains that the chancellor's growth forecasts are too optimistic, which means that his projections for future tax revenues are also on the bullish side. As a result, it concludes that borrowing will have to rise if the circle is to be squared.
Public sector pay to be squeezed…
During his Budget speech, delivered in advance of the publication of the independent pay review body (PRB) recommendations covering doctors, dentists, nurses and other NHS staff, as well as judges and senior civil servants, the chancellor announced that public sector wage settlements will average 2.25%, although neither the Budget itself, nor the documentation accompanying it, specified the period he was referring to. Brown did, however, state that the government's public sector pay strategy will "combine fairness … with more for nurses [and] vigilance and discipline in the fight against inflation".
…and more jobs to be shed
The government's 2004 spending review set out plans for a gross reduction in the number of civil service and military posts in administrative and support functions of just over 84,000, to be achieved by 200 7/08.
Harsh as these reductions might be, the 2006 Budget contained more bad news for the civil service unions. In advance of the 2007 Comprehensive Spending Review (CSR), Brown announced that four large departments of state - HM Revenue and Customs, the Cabinet Office, the Department for Work and Pensions and the Treasury - will each be expected to reduce their spending by 15% over the three years between 2008 and 2011 in an effort to generate a further £1.8 billion in efficiency savings.
More help for unskilled women
The government has set itself a target of "employment opportunity for all" - what it says is the "modern definition of full employment" - and has expressed an "aspiration" to achieve an employment rate equivalent to 80% of the working age population. However, this desire can only be met, the chancellor says, if more women are encouraged back into the workforce. According to Labour Force Survey, there are 1 million women who are currently not working who would like to do so, and almost 15% of the 5.1 million women who work part time would like to increase their hours.
The government says that it "recognises the scale of the challenge", following the publication of research by the Women and Work Commission (WWC) in February 20062. Set up in September 2004, the WWC was established to consider ways of closing both the "gender pay gap" - defined as the percentage difference in hourly earnings between women's and men's median earnings - and the "opportunities gap" between men and women, within a generation. The government has welcomed the "broad range" of the commission's recommendations, and the Budget contained a package of measures designed to enhance the lifelong learning opportunities for women in training and work. These include:
a doubling of the number of existing Skills Council Coaching pilots in Jobcentre Plus districts, to 16, with a specific focus on helping low-skilled women return to work;
an increase of 50% in the number of pilots delivering level 3 skills, while creating an additional pilot focusing on women with low skills; and
funding for Sector Skills Councils, matched by employers in industries with skills shortages, to develop new ways of recruiting and training low-skilled employees, benefiting an estimated 10,000 women.
Elsewhere on the employment front, the chancellor announced that, from June 2006, the fortnightly job review (FJR) that those in receipt of jobseeker's allowance (JSA) are required to participate in will be "strengthened and refocused … to ensure that only those claimants who are able to demonstrate that they have undertaken their responsibilities to look for work are allowed to continue to claim JSA". Personal advisers who now conduct FJRs will be given "effective powers to sanction those who are unable to demonstrate that they have undertaken sufficient job search".
UK productivity - not as good as it seems?
The chancellor has long emphasised the importance of raising productivity, viewing it as the long-tem key driver of "wages, profits and, ultimately, overall prosperity". In his Budget, the chancellor made much of the fact that over the economic cycle that ended in 1997, UK productivity growth averaged 2% per year, and in the current cycle it is growing at 2.3% - higher than at any time since the 1960s. After decades lagging behind, "Britain has caught up with Germany in terms of productivity, is ahead of Japan and has halved the gap with France," he boasted.
Yet, as many analysts have pointed out, all may not be what it seems. Brown's decision to focus on the UK's productivity performance in the "first half of the current economic cycle" - thereby ignoring a deteriorating picture after 2001 - was described by Martin Wolf of the Financial Times as "bordering on the cheeky".
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Box 1: The 2006 Budget - the main pay, benefit and employment-related changes National insurance contributions National insurance contribution (NIC) (see table 1) rates and thresholds for 2006/07 are as follows: the secondary threshold, the point at which NICs start, rises in line with inflation from £94 to £97 a week for both employers and employees, effective from 6 April 2006;
the upper earnings limit on employee contributions rises by £15 a week to £645. This means that, from 6 April 2006, employees pay NICs set at 11% on weekly earnings between £97.01 and £645. In addition, employees pay NICs set at 1% on all weekly earnings above £645; and
employer NICs, paid on employee earnings above £97 a week, are set at 12.8%. There is no upper limit on employer contribution rates. See table 1 opposite for details of the new NIC rates.
Income tax Changes to the income tax regime, which take effect from 6 April 2006, are as follows: the basic personal allowance (the first part of income on which no tax is paid) increases by £140 to £5,035 a year;
the starting rate threshold (the point at which workers begin to pay the 10% tax rate) increases in line with inflation from £2,090 to £2,150;
the basic rate of income tax remains unchanged at 22%, and is payable on annual income between £2,151 and £33,300; and
the higher rate of income tax also remains unchanged at 40%, while the threshold for the payment of the higher rate increases in line with inflation, and now applies to all income over £33,300 a year. See table 2 and table 3 for details of income tax rates and revised allowances.
Company cars According to Inland Revenue rules, where a car is made available for an employee's private use, a taxable benefit arises. Company car tax (CCT) was reformed in April 2002, and it is now based on the carbon emissions of the vehicle to encourage the take-up of more environmentally friendly cars. CCT is calculated by applying a percentage to the list price of the car, with the percentage relating to the carbon dioxide (CO2) emissions of the vehicle. It ranges (in 1% increments) from 15% to 35% for a petrol car. Diesel cars that do not meet Euro IV emissions standards attract a 3% supplement on the petrol percentages (capped at 35%). The 2004 pre-Budget report announced that, from 6 April 2006, the waiver of the 3% supplement for diesel cars meeting Euro IV standards will be withdrawn in respect of cars registered from 1 January 2006. The CO2 emissions qualifying for the minimum petrol percentage charge (15%) had been set in previous Budgets at 140 grams per kilometre of CO2 for both 2006/07 and 2007/08. The 2006 Budget includes a proposal to reduce the threshold for the minimum percentage charge rate for calculating the benefit-in-kind from company cars from 140 grams per kilometre of CO2 to 135 grams per kilometre for the 2008/09 tax year. The chancellor also announced a new lower 10% CCT band for company cars with CO2 emissions of 120 grams per kilometre or less for the 2008/09 tax year. An additional taxable benefit arises if the employee receives free fuel for the company car for their private use. The taxable benefit calculation was reformed in April 2003 to align the charge with the environmental principles underpinning the CCT system. Since April 2003, the fuel benefit charge has been calculated by applying the appropriate CCT percentage to a set figure. In 2005/06 the figure was £14,400. For 2006/07, the figure for the company car fuel benefit charge will remain unchanged. Exemptions for computers and mobile phones Computers and mobile phones loaned to employees by their employer may be exempt from the tax charge on the benefit in kind arising from such a loan. For computers, the exemption currently applies to the first £500 of annual benefit in kind. There is currently no limit to the number of mobile phones that can be loaned to employees, and no financial limit on the value of this benefit. The 2006 Budget removes the exemption for computers made available by employers to their employees for private use. It will also restrict the number of mobile phones employers can loan to employees for private use, tax-free, to one per employee. The tax-free loan of a mobile phone will no longer extend to members of the employees' family or household. Some employers have chosen to use vouchers as the mechanism for making available mobile phones to their employees for private use. In these circumstances, a charge to tax and class 1 NICs arises on the provision of the voucher. From 6 April 2006, the provision of a voucher will be exempt from tax and NICs where it is used to facilitate the loan of a mobile phone to an employee for private use, but only where the benefit in kind arising on the loan of the mobile phone would have been exempt if a voucher had not been used. This means that the method used by employers to loan mobile phones to employees will have no effect on the outcome for tax and NICs purposes. Visual display unit (VDU) users: eye tests and glasses Employers are required by law to provide, or meet the cost of, eye care tests and/or corrective glasses for VDU use for their employees. HM Revenue and Customs (HMRC) would not normally expect a tax charge on the benefit-in-kind. However, this would not be the case if eye tests and/or glasses were provided by means of a voucher. With effect from 6 April 2006, the rules have been amended to ensure that there is no tax charge however an employer pays for an eye test and/or corrective glasses, whether direct to the provider, by reimbursing the cost to the employee, or by providing a voucher. Child tax credit A child tax credit (CTC) was introduced in April 2003, replacing the child elements of the working families' tax credit, the disabled person's tax credit, income support or jobseekers' allowance, and the children's tax credit. Paid on top of child benefit and directly into the bank account of the main carer, the CTC provides, from 6 April 2006, a child element of £1,765 a year, up from £1,690. This rise of £75 is in line with the increase in average earnings, rather than inflation, as announced in the 2005 pre-Budget report. The child element of CTC will increase at least in line with average earnings up to and including 2009/10. The disabled child elements of CTC will be uprated in line with inflation from £2,285 to £2,350 a year, with the "severely disabled child element" also rising in line with inflation from £920 to £945 a year. The family element of the CTC remains unchanged at £545 a year. Working tax credit The working tax credit (WTC) has replaced both the working families' and disabled person's tax credits. In conjunction with the minimum wage, it is designed to tackle poverty among those in employment. From 6 April 2006, the basic element of the WTC will rise with inflation from £1,620 to £1,665 a year, with the couple and lone parent element rising from £1,595 to £1,640. Other elements of the WTC also rise in line with inflation. Childcare The maximum eligible childcare costs remain at £175 per week for families with one child, and £300 per week for those with two or more children. The maximum percentage of eligible childcare costs that can be claimed increases from 70% in 2005/06, to 80% in 2006/07. In addition, the government has announced that £8 million will be made available by way of new capital grants to encourage small and medium-sized workplaces to establish workplace nurseries. |
Table 1: National insurance contributions from 6.4.061
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Weekly earnings |
National Insurance rate for employees |
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Up to £97 |
Nil |
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£97.01 to £645 |
11% of £97.01 to £645 per week |
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Over £645 |
1% |
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Weekly earnings |
National Insurance rate for employers |
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Up to £97 |
Nil |
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Over £97 |
12.8% |
1National insurance contributions to be paid on al taxable benefits in kind, excluding childcare.
Table 2: Income tax rates from 6.4.06
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Tax rate |
Bands of taxable income |
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Starting rate (10%) |
Up to £2,1 50 |
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Basic rate (22%) |
£2,151-£33,300 |
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Higher rate (40%) |
More than £33,300 |
Table 3: The Budget - key personal finance changes
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Allowances |
£pa |
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Income tax - tax year from 6.4.06 |
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Personal allowance |
£5,035 |
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Blind person's allowance |
£1,660 |
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Income limit for age-related allowances |
£20,100 |
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National Insurance - effective 6.4.06 |
£pw |
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Secondary threshold |
£97 |
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Upper earnings limit |
£645 |
1 A strong and strengthening economy: Investing in Britain's future, pre-Budget report, March 2006, HM Treasury, tel: 020 7270 4558, price £45. Also available at www.hm-treasury.gov.uk , free.
2 Shaping a fairer future, Women and Work Commission, February 2006, available at www.womenandequalityunit.gov.uk , free.
