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 UK Budget 2000.
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For Budget 2001-2002 [click here]

Andy Lindley sifts through year 2000's budget and details the consequences for you and your business.

Andy Lindley is a retired analyst for the construction industry.

N.B. This is quite a lengthy article, we advise you to click here and then print the article or read it offline.


This is a classical pre-election Budget with several big jumps in expenditure concentrated to maximise political effect, only partly offset by many quiet tax increases and with economic policy distorted for electoral advantage.

It is full of misrepresentations. Major expenditure is presented as tax cuts. Claimed inflation adjustments are consistently less than inflation for benefits and allowances exploiting fiscal drag but are consistently more for tax increases. There is a mass of measures, well over 100 in total, with the net effects in any sector often contrary to that claimed. Significant individual measures differ widely from the general claims for a sector. It is not clear that particular expenditure items are as given in the Budget Statement. They cannot be reconciled with the Departmental Expenditure Limits until the summer expenditure review.

Unfortunately the Budget appears to have degenerated into a party political broadcast highlighting choice items of expenditure and taxation and full of fiddling details. This is all a great pity as the Chancellor remains the luckiest, and therefore possibly the most successful for a generation.

Through all the welter of change it is clear that middle income, home owning, mondeo man remains the target of most tax increases with a significant redistribution down to selected poorer groups. Mr Rich continues to get off relatively lightly.


Tax Measures:

As a result of the Budget and phased measures: Taxation of personal incomes is set to increase by 3.45billion. Taxation of personal savings and assets is set to rise 0.9billion. Taxation related to Private Housing is set to rise by 3.14billion, 18.6% due to the loss of miras, stamp duty increases and council tax increases. These housing related taxes, or loss of tax breaks total 20billion this year. Indirect taxation is set to rise by over 1billion this year. Business taxation is stated as falling by 135mn this year. However the CBI, after examining the details, claims that multinational companies are liable to pay an extra 4billion not the 300mn given in the Red Book.

The Budget Balance:

Total taxation in 2000/01 is projected as 349.4billion a rise of 15.8 billion, or 4.7%. This understates taxation as tax credits totalling 10.2billion are counted as tax reductions. Adding other receipts produces a total of 381billion before payments to the EU. Of each 1% of economic growth 70% is taken in taxation so high are effective tax rates. The Treasury suggests there has been a structural change in the economy increasing tax take, others suggest just a forecasting error.

Total public expenditure is projected as 370.9billion, a whopping increase of 25.7billion in cash terms, or 7.44%. This substantially understates total public spending. Within this total social security spending is projected at 99.6billion. However using the National Accounts pub. ONS total social security spending is 117.7billion in 2000/01 some 18.1billion higher than stated by the Chancellor. This includes Disabled Persons Tax Credit 4.9billion, Working Families Tax Credit 5.3billion, Public Service Pensions top-up 5.7billion and other items 2.2billion. Total public spending is therefore 389.1billion, an increase of 27.9billion. In consequence although there is a net repayment of 6billion in public borrowing projected and a small budget surplus the IMF has complained that UK policy is, with such increases, pro-cyclical. At the top of a record run of growth and sharply increased taxes a much higher surplus would be expected.

The Economy:

The Bank must respond to the situation reinforced by the Budget by pressing harder on the interest rate brake. Forecasts of peak base rate this year are between 6.5% and 7.5%. This maintains the Sterling/Euro exchange rate and manufacturing jobs are inevitably sacrificed, vide the car industry.

Both feet down on accelerator and brake will inevitably cause the economy to swerve. The inherent lags suggest not sharply until after the next election, assumed as spring 2001. Then expect both recession risk and inflation risk to increase with the peaking out this year becoming a rapid slowdown through 2001/2002. This can be seen in the Budget forecasts for the economy of rapid growth of GDP in the range 2.75% to 3.25% for 2000 falling back to trend rates of 2.25% to 2.75% in 2001. The margins of error on past forecasts indicate maximum growth could be 3.75% this year falling to a minimum of 1.25% next year, or as low as 2.25% this year and as high as 3.75% next year. Inflation is also set to rise, certainly the headline rate, which should exceed the RPIX projection given of 2.5%.

Expenditure Measures:

As a result of the Budget and phased measures: The highlighted social security payments will rise by 2.1billion this tax year and by 5.2billion in 2002/03. A number of the largest increases are counted as tax reductions e.g. Working Families Tax Credit others are populist e.g. free TV licences for the elderly. Education expenditure is to rise by 1billion. Health is to rise by 4.9billion. Road's expenditure is to rise by 250mn, and other transport by 35mn. Crime fighting expenditure is to rise by 285mn. It is a pity these increases have been kept back until the pre-election year. They could in part have been afforded earlier and reduced problems caused by lack of reform, reversals of previous reforms and often tighter cash limits than the previous government, notably in the NHS.

Construction :

The industry will be affected by many contradictory factors. Private housing will receive a quadruple whammy of three tax increases and higher interest rates that should flatten the market outside the hotspots. In these hotspots it may require the economy to cool next year for them to do so. The stamp duty changes will also impact on commercial and industrial property sectors that are already vulnerable through the exchange rate with a weak Euro, E-commerce and consumer choices. In the public sector expenditure increases on road maintenance, other transport and possibly crime will be useful small injections. The increased waste levy and new aggregates levy add ca. 1% to industry costs. Increased road fuel tax is offset by reduced ved on heavy lorries but added to by company car taxation. The mass of measures supporting small firm's investment and tax reductions notably on CGT will be welcome, but of variable effect. The reform of the scheme for subcontractors with a reduced deduction rate is welcome but complex with other changes. The major increases for heath and education may have little effect on construction. The overall balance of these effects is not yet known but may as usual be overridden by the swings of the economy.

The Measures.

In all there are over 100 tax measures that flow from the Budget process. Of these 59 were announced in the Budget and 32 measures, several of them major, begin in 2000/01 from previous Budgets or Statements. There are also automatic adjustments e.g. to pensions that affect expenditure but are not stated. Detailed updated expenditure figures are not generally provided apart from choice items and annually managed expenditure.

The measures are grouped, listed and assessed below.
Personal Taxation : Incomes

Personal Allowances are reduced in real terms by below inflation adjustments averaging 1.2% adding to fiscal drag e.g. the single persons allowance rises by 50 to 4385 or 1.15% worth 11.00 per year at basic rate. The total adjustments reduce income taxes by ca. 360mn in 2000/01 compared to a full inflation adjustment of 2.2% or ca. 660mn.

The Married Couples Allowance abolition begins, except for pensioner households where it is income limited and part clawed back. This was worth 197 per couple and its abolition increases income tax by 1.4billion in 2000/01. Included is the completion of the elimination of tax relief on divorce maintenance payments.

Income Tax Bands are also adjusted by less than inflation over the past year at ca.1.4% worth 110mn; a 2.2% adjustment is ca. 173mn.

MIRAS Abolition begins. This was worth 1.6 billion in 1999/00 and is projected to increase tax by 2.05billion in 2000/01 or up to 232 per mortgage.

Basic Rate cut to 22% begins. The 1% reduction reduces tax take by 2.35billion in 2000/01 and is worth ca.156 per year to someone on average earnings. It is more than eliminated by income tax increases.

The 10% band is extended to investment income, tax reduced by ca. 140mn in 2000/01.

Company Car Taxation. The fuel scale charge is revalorised, extra tax 60mn in 2000/01. A new system based on exhaust emissions from 2002, which eliminates the encouragement of business use.

Nics for employees and self-employed increased by widening the bands and fiscal drag working together. Maximum employee nics rise by 5.72% or 129.20 per year as upper limit raised 1,842 to 27,820 and lower limit by 520. In addition reform of self-employed nics also begins with increased tax of 210mn in 2000/01. Total nic tax take including employers is projected to rise by 2.4billion in 2000/01 to 58.8billion, +4.26%. The two-step alignment of nics and personal allowances appears to increase nics despite Budget figures to the contrary.

IP35 implementation to begin. This attacks self-employment using companies to receive what are essentially salaries, increases tax take ca. 900mn in 2000/01.

Electronic filing of self-assessment tax returns to receive a discount of 10 each, tax take cut by 5mn in 2000/01.

Construction industry scheme for subcontractors without a certificate, deductions to begin at the reduced rate of 18% instead of 23%, reducing income tax by 150mn in 2000/01. There is both consultation proposed and various technical changes. Total direct personal tax changes produce a net increase of ca. 3.45billion in 2000/01,plus fiscal drag on income tax due to rising incomes. Personal Taxation : Savings and Assets

Stamp Duty on land and property purchases to be increased by 0.5% above 250,000 and 500,000 to 3% and 4% respectively, extra tax take ca.285mn in 2000/01. This is becoming both a wealth tax and southeast congestion tax. Note Stamp Duty also applies to stock market transactions and non- domestic property but registered social landlords will be exempt. The highest rate equals office rental yields and is likely to produce distortions. Stamp duty has become a significant tax raising 7.2 billion from all sources in 2000/01.

Stakeholder pensions integrated tax regime from 2001. Cost to Revenue ca. 150mn in 2001/02 and 620mn by 2002/03.

Isa's first year allowance of 7000 and cash limit of 3000 extended a further year. Cost to revenue ca. 40mn in 2000/01.

New all-employee share plan to begin. This is less favourable than previous schemes and reduces revenue by ca. 120 mn in 2000/01 rising to 370 mn in 2002/03.

Inheritance tax starting point raised by less than inflation or 3,000, 1.3 % to 234,000, tax reduced by 15mn. A 2.2% adjustment would be a 5,000 threshold increase.

Capital gains tax threshold increased by 100, 1.41% to 7,200. 10% rate band extended to capital gains. However countering use of gifts and trusts begins increasing tax take by 150mn in 2000/01.

Council tax increases by an average of 6.25% or ca. 3 times the rate of inflation as a consequence of the budget settlement with local authorities. The council tax-take rises by 800mn to 13.6billion. Total tax on personal assets and savings rises by 915mn in 2000/01. The overall personal tax increases related to private housing are ca. 3.14 billion, or 18.6%, to a total of around 20billion per year, counting loss of miras, stamp duty and council tax. This is ca. 1.5% of the value of the private housing stock.

Indirect Taxation

Road fuel duty is increased by an average of 3.4%, except for ultra low sulphur petrol, adding ca. 2p per litre to prices and raising 715mn in extra tax. Cost to a typical motorist is ca. 30 per year.

Vehicle excise duty on cars frozen this year but is to rise by 5 to 160 or 105 for the reduced rate in 2001/02. The lower rate will then be extended to 1200cc, and emissions based system introduced for new cars.

VED on lorries for 2000/01 is being cut for 38 and 40 ton, set at a lower level for the 44 ton 6 axle in 2001 and rise in line for cars for the smaller vehicles. These reductions acknowledge the excess taxation on an international industry and will reduce tax by 45mn in 2000/01.

An aggregates levy on new production to begin in 2002/03 at an initial rate of 1.60 per tonne to produce ca. 385mn in the first year. This is ca. 0.64% addition to construction industry costs.

VAT registration level to rise by 1,000, 1.96% to 52,000 saving 5mn in tax.

Landfill tax to rise by 1 to 11per tonne and tax take by 30mn in 2000/01. Minor adjustments to landfill tax to avoid taxing sorting prior to filling and to ensure the landfill is taxed.

Tobacco duty increased by 8.41% ca. 25p per packet of 20 to produce an estimated extra 375mn. This is coupled with more draconian enforcement to create a clever smugglers charter.

Alcohol duties frozen on spirits, and increased by 3.41% on beer, wine etc to increase tax take by 140mn, again more enforcement and more incentive for clever smugglers

A further 7 minor changes make a net 85mn reduction in indirect taxes, including reduced vat rate extended on energy saving materials. Overall indirect taxes are increased by 1,125mn in 2000/01. Business Taxation There are 30measures affecting business taxation, 20 from this Budget and the balance from previous Statements or Budgets. The net effect is to reduce business taxation by a mere 135mn in 2000/01, by 2002/03 this diminishes to a 119mn reduction. Within this negligible change those items expected to create changes above 100mn per year are listed below. Please note that some businesses will face substantial tax increases. In the mid term medium to small businesses may benefit significantly.

Transitional relief for non-domestic rates of 580mn in 2000/01 turns into a rise of 320mn in 2002/03, a 900mn turn-round overall.

Capital Gains Tax reforms announced in the Budget are offset by ant-avoidance measures to produce a net reduction of 105mn in 2001/02, but some companies face increased capital gains tax. There will however be some significant winners from the enhanced taper provisions reducing CGT for business assets to 10% after 4 years.

The Small Companies Corporation Tax 10% rate has nil effect in 2000/01 but reduces tax take by 140mn in 2002/03.

The SME's permanent first year capital allowances at 40% have a negligible effect in 2000/01 but by 2002/03 reduce tax take by 330mn.

Changes to double taxation relief for large businesses increase tax take by 40mn in 2000/01 rising to 140mn in 2001/02.

Employers Nics are extended to benefits in kind and increase tax take by 225mn in 2000/01, through the 0.1% offset for the aggregates levy this turns into a 100mn reduction by 2002/03.

Several changes increase tax take on insurance companies and Lloyds by 50mn in 2000/01 rising to 240mn by 2002/03.

Those foreign companies in the "controlled" category face an increased tax take of 40mn in 2000/01 rising to 150mn by 2002/03.

The element of stamp duty that falls on business is estimated to increase by 160mn in 2000/01 and rise by 246mn in 2002/03 from technical changes as well as the increase in rates.

Expenditure There are 20 expenditure measures stated in the Red Book under Budget Measures. Several of these are stated as tax reductions but are classified as expenditure under national accounts definitions. 11 are from this Budget. These measures cost 2,110mn in 2000/01 but rise sharply to 5,210mn by 2002/03.

The increase in Working Families Tax Credit, under 16-child credit plus various incomes related benefits increases expenditure by 790mn in 2000/01. By 2002/03 this rises to 1,320mn before future inflation adjustments.

The introduction of Child Credit in April 2001 and its inflation adjustment in this Budget costs 1,700mn in 2001/02 rising to 2,180mn in 2002/03.

The 150 annual fuel allowance for pensioners costs 430mn in 2000/01.

The payment of TV licences for over 75 year olds by the Treasury from October this year costs 345mn in 2000/01.

The increase in child benefit to 15 per week for the first child and 10 for additional children costs 255mn in 2000/01.

The increase in the pensioner's minimum income guarantee costs 220mn.

There were other minor measures for job grants, income support for mortgage interest, housing benefit simplification, earnings disregard for income support, sure start maternity grant, pensioners minimum income capital limits, etc increases expenditure by 90mn.

In the Budget Statement the Chancellor made references to specific increases in public expenditure beyond those noted above. Notably on education 1billion, health especially the NHS 4.9billion, roads 250mn, other transport 35mn, and crime fighting 285mn. However, previous Departmental Expenditure Limits are given in the Red Book with no details of programmes. In particular Budget increases are given as an overall lump sum unallocated to Departments or programmes. It is therefore necessary to await the summer expenditure review to understand specific expenditure implications.

Sources: The Budget Speech, The Red Book, Press Releases on taxation and the National Accounts pub. ONS.

A. Lindley 28.4.2000



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last modified: May 25th 2001