The 2004 Budget: Prudence for a purpose
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The Chancellor painted a rosy picture of the economy, with gross domestic product (GDP) forecast to expand by between 3% and 3.5% in both 2004 and 2005.
Public sector trade unions representing the 40,000 workers whose jobs are to be lost reacted angrily, saying that the desired efficiency improvements would not be met with such job cuts. |
Many analysts viewed Gordon Brown's eighth Budget speech as a generally low-key affair - perhaps paving the way for something more adventurous in 2005. Below, we summarise the main points of interest to pay practitioners.
In a 53-minute Budget speech variously described as "overtly political" and "the launch of a 14-month general election campaign," the Chancellor, Gordon Brown, produced a monetary and fiscal package of few surprises, and even fewer shocks1. He painted a rosy picture of the UK's current and future economic position, while at the same time cementing his reputation for caution ahead of what may turn out to be more of a "giveaway" Budget this time next year when, according to many commentators, the government will be preparing for a dash to the polls in May 2005.
In doing his sums, the Chancellor found room for further substantial increases in expenditure on the provision of what he describes as "front-line" public services. The cash for this is to be generated by a series of efficiency measures, including the loss of more than 40,000 civil service jobs over the next four years, a move heavily criticised by the trade unions (see box 1 ). In taking this tack, Gordon Brown has, in the eyes of many observers, played an astute hand of political poker. He has sought to "shoot the Conservative's foxes" by calling for substantial efficiency savings in the public sector, worth 2.5% of total expenditure. At the same time, he has attempted to allay union concerns about the level of job losses among Britain's public servants by diverting the resulting cash into service provision in education and transport, as well as the Home Office and Ministry of Defence.
In general terms, the Chancellor stuck to previously announced predictions for growth and spending. This should come as little surprise, not least because his eighth Budget speech since 1997 was delivered barely three months after the Treasury's state-of-play assessment of the UK economy as presented in the December 2003 Pre-Budget report 2. Thus, gross domestic product (GDP) is forecast to expand by between 3% and 3.5% in both 2004 and 2005, with inflation, as measured by the consumer prices index, expected to rise through the course of this year to reach the government's 2% target by mid-2005.
Gordon Brown did, however, make great play of one change in the nation's economic performance, albeit a historical one. In December last year, he proudly announced that the domestic economy was enjoying its longest period of sustained growth for more than 100 years. Apologising to the House of Commons during his Budget speech, he stated that, after asking the Treasury to investigate the matter in greater detail, he was able to announce that Britain was actually enjoying its longest run of sustained economic growth for more than 200 years, dating back to the industrial revolution.
Pay and employment-related measures
After the significant reforms in taxation that came into effect last April - notably the overhaul of the national insurance system - this year's Budget was markedly free of major change. However, there are a number of proposals of interest to pay and HR specialists, and these include:
an increase in National Insurance Contribution (NIC) thresholds in line with inflation, with the starting point for both employers' and employees' NICs increasing to £91 a week from 6 April 2004. NICs are not paid on earnings below this level. The upper earnings limit rises from £595 to £610 a week. This means that, for employees, an NIC rate of 11% applies to all earnings between £91 and £610 a week, with a rate of 1% payable on all weekly earnings above £610. For employers, NICs are now payable at a rate of 12.8% on all earnings above £91 a week, without an upper limit;
unchanged rates of income tax , pegged at 10% (starting rate); 22% (basic rate); and 40% (higher rate);
an indexation of the 10% starting-rate income tax band , lifting it from £0-£1,960, to £0-£2,020 a year;
a rise, in line with inflation, in the basic-rate income tax limit , so that it now applies to annual income between £2,021 and £31,400;
an increase, again in line with inflation, in the personal income tax allowance for those under 65 , taking it from £4,615 to £4,745 a year;
a rise, in line with earnings, in the personal allowance for those aged 65 and over , to £6,830 a year for those between 65 and 74, and from £6,720 to £6,950 for those aged 75 and above;
a £180 increase in the child element of the child tax credit (CTC), taking it to £1,625 a year. In addition, the disabled elements of the CTC rise in line with inflation, as do the various elements of the working tax credit (WTC);
a freeze in the CO2 levels applicable to company cars qualifying for the minimum tax charge at 140g/km for 2006/07. Company car fuel benefit charges also remain unchanged;
from 6 April 2005, the introduction of a nil charge for tax purposes for employees who have to take their company van home, and who are not allowed other private use;
also from 6 April 2005, the introduction of a new tax exemption on up to £50 a week of provision of good quality, formal childcare, contracted by the employer or paid for by the employee with childcare vouchers provided by the employer; and
an increase in the pension scheme earnings cap to £102,000 a year.
Boosting employment, productivity and enterprise
Confirming the government's long-term goal of "employment opportunity for all" - its definition of full employment - Gordon Brown stated that "individuals who want, and who are able, to work should be provided with the support they need to enable them to find employment and develop skills." To reduce what the government sees as "barriers to work", the Chancellor introduced a number of measures, many of which were heavily trailed in the 2003 Pre-Budget report. They include the:
trial of a mandatory "work-focused interview regime" for some existing claimants of incapacity-related benefits in the Pathways to Work (PW) pilot areas;
piloting of a "preparation premium" of £20 per week in PW trial areas for existing claimants of incapacity-related benefits who undertake relevant activity that supports a return to work;
introduction of a "worksearch premium" of £20 per week in six pilot areas with high levels of unemployment, available to those unemployed in a family in receipt of the WTC;
extension of measures for lone parents in six cities with large lone parent populations, including access to NVQ level 3 training; and
introduction of "Fair Cities" initiatives, to be established in three areas later this year, to improve employment for people from disadvantaged ethnic minority groups.
As has been the case in previous years, the Chancellor also took the opportunity to introduce a series of measures to boost productivity and promote enterprise. Stating the government's intention to "reduce the regulatory burden where it can", Gordon Brown announced consultation on plans to phase-out the payment of the WTC by employers in favour of a system of a direct remittance to the recipient, a move widely welcomed by business leaders.
Within the rules . . . but only just
In recent times, the "Iron" Chancellor's reputation for prudence has taken something of a battering, with doubts surfacing about his ability to stick to his much-vaunted "golden rule" that, on average over the economic cycle, the government should borrow only to invest, and not to fund current expenditure.
In December last year, Gordon Brown reported that the average surplus was projected to fall to just 0.2% of GDP, compared with at least 0.5% of GDP, as predicted by the government at the start of the current economic cycle. As a result of this Budget, he remains on course to keep to the "golden rule" - but by an ever-decreasing margin. It is now down to £11 billion - just 0.1% of GDP. This, as many analysts have pointed out, leaves the Chancellor with precious little room for manoeuvre in the coming months.
Other key economic assumptions and predictions contained in the 2004 Budget include:
Prices: in December last year, the government confirmed that, with immediate effect, its inflation target would be based on the harmonised index of consumer prices (HICP), renamed by the National Statistician as the consumer prices index (CPI) for the UK. This is an international measure that allows inflation rates across the European Union to be compared on a like-for-like basis. It is also the European Central Bank's preferred measure of inflation. Crucially, this new yardstick excludes housing costs and house price appreciation.
The 2004 Budget confirms that the CPI inflation target is pitched at 2%, half a percentage point below the previous target of 2.5% for the 12-month increase in the retail prices index excluding mortgage interest payments (commonly known as "underlying inflation", or by the acronym RPIX). The Treasury says this dissonance is explained by differences in the way the respective indices are compiled, adding that the CPI target is set to be consistent with RPIX in two years' time.
Growth: according to the government, the domestic stability delivered by its policies has enabled the UK to cope well with the significant challenges that have faced the world economy in recent times. While many other countries have experienced recession, Gordon Brown was able to boast that the UK grew continuously throughout the global downturn that began in 2001. Indeed, the Treasury states that the UK is the only major economy not to have experienced at least one quarterly contraction in output over the past three years, with GDP now having grown for 46 consecutive quarters - the longest sustained period of economic growth on record.
The domestic economy grew by 0.9% in the fourth quarter of 2003 - the fastest rate of expansion for more than three-and-a-half years. In 2003 as a whole, GDP rose by 2.3%, consistent with the 2003 Budget forecast that predicted growth would be pitched at between 2% and 2.5%, and slightly above the 2003 Pre-Budget estimate of 2.1%. Looking ahead, the Chancellor expects the economy to expand by between 3% and 3.5% in both 2004 and 2005 before returning to trend in 2006, when GDP is forecast to increase by between 2.5% and 3%.
Taxation and spending: much of the fine economic and financial detail underpinning Gordon Brown's assumptions is to be found in what is commonly known as the "red book," published by the Treasury to accompany the Budget. This shows that the Chancellor expects tax revenues of £421.5 billion this year, rising to £454.7 billion in 2005/06, boosted by increases in income tax, corporation tax, stamp duty and value-added tax as economic activity accelerates. However, many in the City are questioning the Treasury's over-reliance on buoyant tax receipts in the coming years, and if they do fail to materialise, the government may be forced to borrow more, or reduce expenditure, to make Gordon Brown's sums add up.
On the spending front, the single most costly new announcement contained in the Budget is the relatively small £475 million allocated to fund a one-off bonus payment of £100 to pensioners. However, far bigger sums (forecast to be £20 billion a year) will be allocated to "front-line" public services. This is to be funded by efficiency savings that include substantial civil service job losses - notably 30,000 from the Department of Work and Pensions and around 10,000 as a result of a merger between the Inland Revenue and Customs and Excise - and the relocation of a further 20,000 government posts outside of London and the South East. As a result, Gordon Brown plans to spend an additional £8.5 billion on education over the next three years, with an additional £6 billion allocated to the "war on terror".
Deficit: Gordon Brown expects to borrow £37.5 billion in the current financial year, £100 million more than anticipated in the Pre-Budget report. However, levels of borrowing are expected to fall back to £33 billion for 2004/05 and to £31 billion in 2005/06.
1.Budget report 2004 - prudence for a purpose: a Britain of stability and strength, March 2004, available from HM Treasury, tel: 020 7270 4558, price £45. Also available, free of charge, on the internet at: www.hm-treasury.gov.uk .
2.2003 Pre-Budget report, December 2003, available from HM Treasury, tel: 020 7270 4558, price £45. Also available, free of charge, on the internet at: www.hm-treasury.gov.uk.
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Budgets invariably attract a good deal of comment, criticism and even praise from various organisations representing those affected. Below, we present a sample of reactions to Gordon Brown's speech. Unison Unison is Britain's biggest trade union, with over 1.3 million members, the vast majority of whom work in the public sector. Commenting on the Budget, general secretary Dave Prentis described it as a "win-win for people and public services", adding that Gordon Brown has had both "the courage and foresight to plan further ahead than many politicians . . . Staff morale on wards and in classrooms will be lifted by the Chancellor's determination to continue investing in public services, and both patients and children will reap the benefits." The major downside, in Unison's opinion, is the substantial loss of jobs in the civil service. PCS As one would expect, the reaction from PCS, the trade union representing almost 300,000 employees working in government departments and agencies, was far less positive. General secretary Mark Serwotka described the Budget as the "day of the long knives" after the loss of around 40,000 civil service jobs by 2008 was announced by the Chancellor. "For thousands of hardworking staff to hear that they are losing their jobs out of the blue without consultation is unacceptable," Serwotka said. While maintaining that the union was not against a "more efficient civil service with more resources going to the front line" it was, in his view, "difficult to see how services will improve with such swinging cuts". "If the government is serious about tackling tax evasion, combating smuggling, achieving full employment and a skilled and educated workforce, then arbitrary cuts in vital public services are not the answer. The manner in which they were announced will do nothing to boost the morale of hardworking public servants who provide vital services to people from the cradle to the grave. It's a case of the day of the long knives for public servants across the UK," he concluded. Prospect Serwotka's sentiments were echoed by Paul Noon, general secretary of Prospect, a union representing around 100,000 members in the public and private sectors, including some 40,000 civil and public servants. "Nobody would argue with the need for genuine efficiencies," he said, "but not cost-driven cuts." "It is a myth that all public servants are bureaucrats working in backroom offices. Government priorities . . . can only be delivered by professionals. They are the true front line, and they are all public servants. They must not fall victim to swinging attacks on waste and bureaucracy. They need more resources, not less. The government's programme of change will not succeed unless it takes civil and public servants with them. It needs to engage more effectively with its own staff, and their representatives, or their plans are doomed to fail," Noon argued. Confederation of British Industry The reaction to the Budget from business leaders was generally more positive. Digby Jones, director-general of the Confederation of British Industry (CBI) described the Chancellor's package as both "innovative and meaningful", with the emphasis on "protecting economic stability and curbing public sector waste". Jones expressed his "delight" with Gordon Brown's commitment to increase productivity from taxpayers' money: "At last we are seeing a real attempt to tackle outdated ways of working that have often resulted in the inefficient use of public money," he said. Institute of Directors The Institute of Directors (IoD) described the Budget
as being "mixed" for business. There were several positive steps, said
George Cox, the organisation's director general, notably in relation to
measures to "reduce red tape and bureaucracy". The IoD was particularly
pleased with the decision to relieve businesses of the duty to pay in-work
benefits, such as the working tax credit. However, on the downside, the
institute remains concerned about what it sees as the "rising burden of
public spending and taxation projected for the coming
years". |
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Weekly earnings |
National Insurance rate for employees |
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Up to £91 |
Nil |
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£91.01 to £610 |
11% |
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Over £610 |
1% |
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National Insurance rate for employers |
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Up to £91 |
Nil |
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Over £91 |
12.8% |
1 NICs to be paid on all taxable benefits in kind, excluding childcare.
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Tax rate |
Bands of taxable income |
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Starting rate (10%) |
Up to £2,020 |
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Basic rate (22%) |
£2,021-£31,400 |
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Higher rate (40%) |
Over £31,400 |
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Allowances |
£PA |
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Income tax - tax year from 6.4.04 |
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Personal allowance |
4,745 |
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Blind person's allowance |
1,560 |
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Income limit for age-related allowances |
18,900 |
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£PW |
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National Insurance - effective 6.4.04 |
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Lower earnings limit |
91 |
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Upper earning limit |
610 |
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National Insurance Contributions National Insurance Contribution (NIC) rates and thresholds for 2004/05 are as follows:
See table 1 for details of the new NIC rates. Income tax The changes to income tax, which take effect from 6 April 2004, are as follows:
See table 2 and table 3 for details of income tax rates and revised allowances. National minimum wage An increase in the national minimum wage (NMW) was announced just before the 2004 Budget. As a result, the NMW will rise in October 2004 from £4.50 to £4.85 an hour for adult workers aged 22 and over. This represents an uplift worth almost 7.8%. For workers aged between 18 and 21, and for workers in training, the rate will rise by 30p an hour to £4.10 from the same date, an increase of 7.9%. In last year's Budget, the Chancellor announced a review of the case for a minimum wage to be extended to 16- and 17-year-olds who, at that point, were not covered by any statutory pay floor. This formed part of a wider review of the training, pay and employment needs of young workers. As a result, from October 2004, the NMW will, for the first time, be extended to cover employees below the age of 18, with the hourly rate set at £3. Pensions The pension scheme earnings cap sets a ceiling on the contributions that can be paid to, and the benefits that can be paid by, tax approved pension schemes. It generally applies to people who: contribute to a personal pension scheme; joined an occupational scheme set up since 14 March 1989; or joined any occupational scheme from 1 June 1989 that was set up before 14 March 1989. From 6 April 2001, the cap applied to people who contribute to stakeholder pensions schemes. For 2004/05, this cap is increased to £102,000. Company cars Since April 2002, the taxation of company cars has been based on exhaust emissions, rather than the number of miles travelled. Charges range from 15% of the car's list price, up to a maximum of 35%. As a result of last year's Budget, the level of CO2 emissions qualifying for the minimum company car tax charge will reduce by 5g/km to 140g/km from 6 April 2005. The 2004 Budget freezes this threshold for 2006/07. The percentage charge continues to rise in 1% steps up to the 35% maximum. The tax system applicable to company car fuel applies the same percentage as the company car charge against a set figure. For 2003/04, it was set at £14,400, and it will remain pegged at this level for 2004/05. Company vans From 6 April 2005, a nil charge will apply to employees who have to take their van home, and who are not allowed other private use of the vehicle. As a transitional measure, the benefit-in-kind charge of £500 (and £350 for older vans) continues for all vans where private use is unrestricted. From 6 April 2007, the scale charge for unrestricted use will be set at £3,000, with a £500 charge for employer-provided fuel. Under the revised arrangements, basic rate taxpayers who choose to have unlimited private use of their vehicles will pay 22% of £3,000, equal to £660 benefit-in-kind taxation, from 2007. These changes do not apply to the self-employed. According to the Treasury, this measure will result in 85% of company van drivers who currently pay a charge being taken out of the system. 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 persistent poverty among those in employment. From 6 April 2004, the basic element of the WTC will rise in line with inflation, from £1,525 to £1,570 a year, with the couple and lone parent element rising from £1,500 to £1,545. Other parts of the WTC also rise in line with inflation. Child tax credit A
new child tax credit (CTC) was introduced in April last year, 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 2004, a
child element of £1,625 a year, up from £1,445. The family element of £545
a year remains unchanged. |
