Budget 2007: key announcements

Gordon Brown’s 11th Budget contained some real surprises – particularly on tax. Below we take a look at the changes most relevant to HR professionals.

• The economy
• Workplace dispute resolution proposals
• Public sector pay and jobs
• Reactions to the 2007 Budget
• Box 1: At a glance – key employment-related changes for 2007/08
• Table 1: National insurance contributions from 6 April 2007
• Table 2: Income tax rates from 6 April 2007
• Table 3: The Budget – key personal finance changes

The biggest surprise in Chancellor Gordon Brown’s 11th Budget¹ came just seconds before his speech ended. The basic rate of income tax would be cut by 2p to 20p from April 2008, he announced. “It was bold; it was not boring: why did he wait so long?” asked an analyst from RBS bank, who suggested that this was Brown’s most radical budget by some distance.

The 10p starting rate of income tax, which was introduced by the chancellor in 1999, will be abolished from the same date, meaning that all income tax-payers will start paying at a rate of 20p in the pound. The figures contained in the Budget report suggest that most of the cost of reducing the basic rate of income tax will be funded by the abolition of the starting rate, leading to accusations that many taxpayers will be left no better off in real terms. This looks set to be particularly true of low-earners with no children, who do not benefit from increases in value to the various tax credits targeted at working parents.

Changes to income tax, which also include the gradual alignment of the national insurance and tax thresholds, were accompanied by changes to the corporation tax regime. The headline rate of corporation tax will be reduced from 30% to 28% from April 2008. However, there will be a staged increase in the small companies' rate of corporation tax, from 19% to 20% this year, with further 1% increases in 2008 and 2009. “The business sector as a whole will not be popping the champagne corks tonight,” commented business lobby group the CBI on Budget day. Most economists were of the view that this was a broadly neutral budget, with tax cuts offset by tax rises in other areas. “Politically astute; fiscally neutral” was the verdict of analysts at HSBC on the Budget, while Oxford Economic Forecasting thought that: “This was a Budget of grand gestures but with little economic impact. What the chancellor gave away with one hand – to great political effect – he took back with the other.”

For HR and reward specialists, there do not appear to be any major surprises hidden in the Budget along the lines of the withdrawal of tax exemptions for home computing initiatives in last year’s statement. Below we have pulled out the key changes of interest to HR and reward practitioners, including the economic outlook, proposed amendments to statutory dispute resolution and changes to tax, national insurance and tax credit rates.

The economy

“My report to the country is of rising employment and rising investment; continuing low inflation and low interest rates and mortgage rates,” the chancellor told the House of Commons, setting the tone for his upbeat assessment of the UK economy.

Predictions for growth were unchanged from those in the pre-Budget report, with the economy expected to grow by between 2.75% and 3.25% in 2007 and between 2.5% and 3% in the following two years. While the chancellor has often been criticised for over-optimistic growth forecasts, his growth forecast of 2.5% for 2006 in the pre-Budget report proved correct. As the Financial Times commented the day before the Budget, “Economists still think he is being too optimistic with a growth forecast of 2.75% to 3.25% this year, but they are slowly coming round to his way of thinking.”

The chancellor was confident in his predictions for low and stable inflation – despite the fact that official data published the day before the Budget revealed that consumer prices index (CPI) was 2.8% in February, up from 2.7% in January 2007. Inflation measured by the retail prices index (RPI) measure rose sharply to 4.6% – up by 0.4 percentage points from January 2007 and the highest annual rate since 1991. The chancellor said that since 1997, however, inflation has averaged 1.5%. “After examining the historical records, it is Britain’s best inflation performance for a century,” he said. The chancellor is sticking to his prediction that CPI inflation will fall back over this year to 2% and will remain on target during 2008 and 2009.

The chancellor was once again able to announce that both his fiscal rules will be met. The first is the “golden rule”, which means that the government’s current budget should be in surplus over the course of the whole economic cycle. “In this cycle, we have not only balanced current spending and revenues but are able to report a surplus of £11 billion – demonstrating that for the first time in four decades Britain has met the golden rule,” the chancellor revealed.

Brown also trumpeted the meeting of the sustainable investment rule, which stipulates that public sector debt cannot exceed 40% of gross domestic product (GDP). It is expected to be 38.2% in 2007/08. Public borrowing for 2006/07 was revised downwards by £2 billion to £35 billion, but revised upwards for 2007/08 from £31 billion to £34 billion.

On public spending, the chancellor announced tight spending limits for the forthcoming Comprehensive Spending Review – which covers departmental spending from 2008 to 2011 – the details of which will be released later in 2007. Total public spending is due to increase by an average of 2% a year in real terms. “He has confirmed that the next few years will see the tightest squeeze on public spending for a decade,” commented Robert Chote of the Institute for Fiscal Studies. An early spending settlement for the Department for Education and Skills (DfES) is due to increase education spending in England by 2.5% per year in real terms, however.

Workplace dispute resolution proposals

Immediately after the Budget, the Department of Trade and Industry launched a consultation on proposals to scrap the workplace dispute resolution procedures introduced in October 2004.

The report², from PowerGen’s former communications director Michael Gibbons, was commissioned by the government in December 2006 in the face of mounting evidence that the 2004 reforms were failing to cut the number of employment tribunal claims.

Gibbons recommends repealing the dispute resolution Regulations, which he says have exacerbated minor workplace problems that could otherwise have been resolved informally and that have led to an expectation that there will be a tribunal case.

In their place, he wants to see:

• clear, simple, non-prescriptive guidelines on grievances, discipline and dismissal in the workplace;
• incentives to comply with the guidelines based on greater discretion for employment tribunals to vary awards and costs depending on each party’s behaviour; and
• more emphasis on early dispute resolution, through in-house mediation, neutral evaluation and provision in contracts of employment.

He also recommends a fast-track process to settle monetary disputes on issues such as wages, redundancy and holiday pay without the need for a tribunal hearing, and better advice for claimants and respondents that stresses alternative dispute resolution.

The report calls for an end to the controversial fixed conciliation periods during which Acas can operate; the piloting of a free early dispute resolution service; and the strengthening of incentives to use such services through greater discretionary powers for employment tribunals.

It also says the employment tribunal system should be made simpler and cheaper for users and government. Specific recommendations include:

• unspecified measures to simplify employment law;
• more straightforward employment tribunal claim and response forms without the current legalistic detail;
• unified time limits for claims and common grounds for their extension;
• encouragement for employment tribunals to be involved in active, early case management;
• eliminating lay members from more complex tribunal hearings; and
• looking at additional powers for tribunals to deal with weak and vexatious claims.

Consultation on the proposals will end on 20 June 2007.

Public sector pay and jobs

The chancellor reaffirmed the government’s commitment to maintain discipline in public sector pay as key to securing the 2% CPI inflation target. “The overall package of settlements provides a sustainable, affordable set of pay awards that helps contribute to low inflation and economic stability,” the Budget report stated.

The chancellor also reported on progress towards the efficiency savings he wants government departments to achieve, revealing that these have delivered £15 billion in savings (as at December 2006) against a target of £21 billion by 2007/08. The Budget report said that there has been “significant progress” in staff reductions, with 50,800 fewer government employees by December 2006, against a target reduction of 70,600 by 2007/08. By the same date, 11,068 employees had been relocated out of London, against a final target of 20,000.

Reactions to the 2007 Budget

The Budget has generated a wealth of comment from a variety of interested parties, including trade unions, business organisations and pressure groups. Here, we summarise some of the key reactions, with links to the statements published on their respective websites.

• Amicus: Amicus general secretary Derek Simpson hailed the extension of the financial assistance scheme (FAS) as “a major step forward to achieving pensions justice”. However, he argued that it should have gone further: “We believe that there is widespread public and political support for the view that those who qualify for the FAS should receive the same as those covered by the [Pension Protection Fund], which provides 90% of expected pension, index linked to RPI.”
  
  
• British Chambers of Commerce (BCC) : BCC director general David Frost welcomed the announcements on corporation tax, with the main rate set to fall from 30% to 28% in 2008/09. However, he was less impressed by the increase in taxes paid by small businesses: “This Budget could be damaging for small and medium-sized businesses in the long term.”
  
  
• British Retail Consortium (BRC) : The retail employers’ federation expressed virtually across-the-board satisfaction with the Budget, giving the chancellor “eight out of 10”. BRC director general Kevin Hawkins welcomed the “partnership for jobs” scheme in which the BRC is participating, stating that: “This is an imaginative and practical scheme. It is not some abstract plan dreamt up by bureaucrats but builds on the help a number of major BRC members are already offering to enable people lacking the skills or self-confidence to get into the workforce more quickly.”
  
  
• CBI: The employers’ body offered qualified support for the reduction in corporation tax. CBI deputy director general John Cridland described this as “only a first step” towards restoring the UK’s international tax competitiveness. But Cridland was more fulsome in his praise of the announcements on the employment tribunal regime, stating that “a risk-based approach is right”.
  
  
• Chartered Institute of Personnel and Development (CIPD):  John Philpott, the CIPD’s chief economist, sees the Budget’s appeal to the HR community as “overall lacklustre”, with only a few measures of specific interest. But with regard to its taxation measures, he hailed the Budget as Brown’s “least predictable and cleverest”. Philpott noted that the headline-grabbing announcements on income tax are balanced “by numerous tax rises pasted into the Red Book, notably removing the 10p starting rate of income tax, greater alignment of income tax and national insurance contributions, more corporation tax for small firms and fewer capital allowances”.
  
  
• EEF: The manufacturers’ organisation expressed mixed feelings on the Budget, commenting that: “As always with the chancellor, it is important to look at the detail. Whilst there are measures to welcome in today’s Budget, few manufacturers will feel a benefit in the short term.”
  
  
• Institute of Directors (IoD): Miles Templeman, IoD director general, expressed delight that the chancellor had apparently acted on the organisation’s concerns that tax was becoming a “tipping point” issue for international companies. “At last we’ve seen a Budget which business can be pleased about,” said Templeman. “The reductions in the main rates of corporation tax and income tax are just what we wanted.”
  
  
• Institute for Fiscal Studies (IFS) : The independent research organisation observed that “Gordon Brown has certainly dashed fears that his swansong Budget would be a damp squib. […] He has already stamped his mark on the machinery of monetary policy and planning the public finances – with a welcome simplification of income tax and national insurance he is staking his claim to be a tax reformer too.” Focusing specifically on the Budget’s tight squeeze on public spending, the IFS states that: “Labour’s years of plenty are at an end.”
  
  
• Public and Commercial Services Union (PCS): General secretary Mark Serwotka roundly condemned Brown’s hardline stance on public spending, arguing that it goes beyond Gershon’s recommendations and greatly increases the probability of further industrial action on the part of civil servants. “Today's Budget will offer little reassurance and makes the possibility of further action imminent, unless civil service management and government sit down with the unions and properly negotiate over the key issues of jobs, pay and privatisation,” said Serwotka.
  
  
• TUC: TUC general secretary Brendan Barber welcomed the financial assistance scheme extension, but argued that it should have gone further: “It still falls short of the compensation required to ensure that victims enjoy the 90% level of support from the Financial Assistance Scheme offered to members of schemes covered by the Pensions Protection Fund. There is still more to do.”
  
  
• Transport and General Workers' Union (TGWU) : The trade union’s response was mixed: “Hard-pressed pensioners and low-paid workers will welcome today's Budget announcements on tax and financial assistance for those who have lost their pensions, but public sector workers and the beleaguered manufacturing sector will continue to feel the pressure in 2007.”

1. Read the chancellor’s Budget speech, full report, press releases and accompanying documents on the HM Treasury website..

2. Press release: DTI consults on streamlined workplace dispute resolution.

Better Dispute Resolution: a Review of Dispute Resolution in Great Britain, by Michael Gibbons.

This article was written by Sarah Welfare, Pay and Benefits Bulletin editor, and Michael Carty, Pay and Benefits Bulletin researcher/writer.