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Darling to tighten purse strings in Budget

Tomorrow's Budget is likely to focus on spending cuts rather than tax hikes, as Chancellor Alistair Darling tries to demonstrate a steady hand on the tiller ahead of the impending General Election.

Mr Darling yesterday reiterated that there are no big giveaways to butter up voters ahead of the election and his belief that people want a sensible and workmanlike Budget.

Following the worst recession in a generation the public are now savvy about the parlous state of the UK finances and it is unlikely they would consider cuts and incentives as anything other than attempts to buy their votes.

Likewise Mr Darling has ruled out a further rise in VAT that might disadvantage the UK at a time when economic recovery is the priority.

While extra duty might go on to the usual suspects of fuel, alcohol and cigarettes, the Chancellor will focus on measures to encourage private sector investment and secure long-term growth.

Opposition parties have already dismissed a Budget so close to the General Election, saying that whatever measures Mr Darling announces will be merely window dressing.

Michael Hall, managing partner of Ernst & Young Northern Ireland, believes international markets and the European Commission are looking to see a credible plan from the UK to reduce the national debt as a key outcome of the Budget. The UK's deficit is expected to hit 12.6% of GDP this year, well above EU rules stating government deficits must be below 3% of GDP.

“With the other major parties announcing their own tax policies, the Chancellor will have a lot of possible measures on the table and will be weighing each of them up in terms of their revenue raising capacity versus the impact on the electorate. By setting out a clear vision now, the Chancellor will show the financial markets that the UK has a considered plan to get us to equilibrium by 2015,” he said.

Any indications of future spending reductions will have big implications for Northern Ireland.

“For Northern Ireland, the potential impact of public expenditure cuts could be significant given its dependence on this steady source of income to support the economy,” said Mr Hall.

“Though the Budget may not bring significant change in public expenditure for the immediate year ahead, there should be greater clarity on the pressures likely in 2011 and beyond. This will give the Executive and Northern Ireland business time to plan for transitioning to a private sector led economy, so often quoted |as the goal of local economy policy.”

Ross Boyd, senior manager at FGS McClure Watters in Belfast, thinks measures should be introduced to favour investment to secure longer term growth and attract new jobs to the UK. “With a growing concern emerging over the Northern Ireland economy compared to the rest of the UK there appears to be an increasingly strong case for regional support, although in the current environment this could fall on deaf ears in the Treasury.

“To date, a reduced rate of corporation tax for Northern Ireland has been rejected, but targeted allowances for businesses could give the same effect. Higher rates of capital allowances for Northern Ireland or even the creation of enterprise zones would help stimulate the local economy,” he said.

“While voters appreciate that change is required, the election and the ‘not in my backyard’ reaction that comes from detailing spending cuts will prevent the Chancellor from addressing these very real issues.”

Mr Boyd believes the Government will set out long-term plans to sustain the recovery, probably over a four year period, without detailing the scale of cuts to come.

He expects more measures to help the long-term unemployed and 18-24 year olds back into the workforce, but does not anticipate any major changes in tax thresholds, with the new 50% tax rate, loss of personal allowances and loss of higher rate pension relief already on the statute book for next year.

Ernst & Young said employers will be hoping the Chancellor will defer the already announced 1% in national insurance contributions past 2011 and also believes Mr Darling could announce a plan to cut corporation tax from 28% to 24% over the next parliament, though not immediately.

Mr Hall adds that in line with changes to the income tax rate, the Chancellor could announce changes to the inheritance tax regime to target higher earners. While Mr Darling has ruled out a rise in VAT to the EU rate of 20% on Wednesday, he believes a VAT hike following the election is a strong possibility.

Small firms are likely to be looking for anything that ensures the tax system focuses on small regional firms as well as large multinationals.

PwC tax partner Martin Fleetwood said: “Local small firms perceive the tax system as complex and favouring large companies. Yet over 70% say that simple and transparent tax credits would persuade them to increase investment in areas as diverse as R&D, marketing and export development.

“Encouraging small firms to invest and grow is vital to the economy; this Wednesday offers Alistair Darling an opportunity to kick-start regional recovery with simple and transparent tax incentives targeted directly at the UK’s small firms.”

Whatever the outcome, experts do not think there will be too much to get excited about. It seems likely to be a ‘steady as she goes’ Budget that signals more change is to come post-election.