Andy Lindley sifts through this year's budget and details
the consequences for you and your business.
BUDGET 2001 - Analyst's Report.
YET MORE, TAX, TAX and SPEND, SPEND, SPEND
This final installment of pre-election budgeting is full of
avoided tax increases.
In consequence the usual boost to inflation from tax hikes in
April will be muted this year so published inflation figures
should fall sharply. It is also full of increased social benefits
aimed at women with children and pensioners, and further increases
in expenditure on top of existing growth. In consequence inflation
will be stronger in later years.
Significant risks are now being taken with the economy, but
they will not kick in this year. They come from sharply rising
expenditure and a move into deficit in the face of increased
risk of recession. No doubt the judgement is these risks can
be tackled later; which means borrowing, and or increased taxes
and trimmed expenditure next year and thereafter. Interest rates
will fall less as a result and then rise more, or rise earlier.
There continues to be the sharp contrast between the announced
measures and the ever rising tax take due to stealth taxes,
and fiscal drag from inflation and real growth. The standard
misrepresentations are indulged in and there are the usual mass
of measures, 83 so far counted. Many pre-budget consultation
measures are implemented and there are significant effects from
Once again middle income, home owning, Mondeo man bears the
brunt, but the announcement of few tax increases may relieve
him, until he receives his council tax bill. Pensioners, women
with children and the poor are the winners, if they can jump
through the bureaucratic hoops and do not trip on the exceptions.
Since the Budget the situation has become distinctly darker,
with the world-wide stockmarket crash, the USA moving closer
to recession, Australia in recession, Japan once more stalled
with other Asian countries slowing, the German economy slowing
markedly, and the foot and mouth epidemic here.
A recession in 2002, if it comes, will make nonsense of both
tax and expenditure projections. Sharply slowing growth this
year may strain them.
This expansionary Budget already seems out of tune with the
As a result of the Budget and earlier measures, in
2001/02; taxation of personal incomes is reduced by £3.54
billion, but is projected to actually rise by £6.0 billion.
Taxation of personal savings and assets is to rise by
a modest £280mn in line with projected actual tax take.
Indirect taxation is to reduce by £1.88billion,
but is still projected to actually rise by £2.3billion.
Business taxation is to reduce by £285mn, however
again the actual tax take is projected to rise by a sharp £7.75billion
largely from corporation tax yield.
In all there are 42 measures reducing tax take, but total
tax receipts are still projected to rise by £13.6billion.
Social security expenditure continues to grow exponentially,
with the start of the Children's Tax Credit, real increases
in the Working Families Tax Credit, and especially in Pensions
plus a host of other benefits. Total expenditure in this area
is projected to rise by £8.23billion in 2001/02 to £112.23billion.
Expenditure in the following year seems likely to rise by ca.
£7billion from existing commitments and inflation.
This Budget has the usual topping up of Health, Education
and fighting crime. They add a total of £720 mn in 2001/02
rising to £795 mn in the following year. Together total
Health and Education spending are projected to rise by ca. £5.6billion
Earlier commitments to increased capital spending are
coming through with the total capital budgets planned to rise
by £3.4billion to £25.3 billion before depreciation
in 2001/02 followed by further rises of £4.1 billion and
£5billion in the following two years. By 2003/04 the total
is planned to be £34.4billion.
Total expenditure rises dramatically by £25.4 billion
or 6.9% in 2001/02 to £393.7 billion and by £24.1
billion to £417.8 billion in the following year. These
totals include tax credits, payments to the EU, debt interest,
civil service pensions and a wide variety of adjustments.
The Budget Balance:
In this Budget and the last one, expenditure was sharply
increased with commitments to further increases in years ahead.
Now the fast growth of tax revenue is being trimmed. In consequence
the projections of tax revenue and other receipts and public
expenditure show a pattern of low and falling surpluses turning
just into a deficit in 2002/03. The figures provided are as
£1.8 billion deficit
£10.2 billion deficit
A diagram with cyclically adjusted projections shows the cautious
case dipping to a deficit of 1% of GDP in 2003/04. These projections
are very subject to error and just one year ahead have been
wrong by almost £10 billion, on average. In recent years
the error has always been favourable.
· The economy reviewed below indicates a likely
change of direction. The financial situation can quickly reverse
with expenditure growing even faster and revenue growth slowing
or even a fall in revenue. This change from virtuous circle
to vicious circle happens in every recession. A recession could
increase the 2003/04 deficit to £30billion, 3% of GDP.
This is not yet in prospect, but the Government is clearly taking
quite a chance. A public sector deficit is normal counter-cyclical
policy in recession, but not piling deficit on deficit because
of the inflation risk and in particular risk to the currency.
A severe limit to deficits is placed on members of the Euro
block. Ireland was admonished recently for its excesses.
The economy performed extremely well in 2000 and exactly
fitted into the middle of the Treasury forecast of a year ago
with 3% GDP growth. The passing of the peak of economic growth
with lower than expected interest rates has allowed the housing
boom to continue into 2001 and coincide with historically low
levels of unemployment, defined narrowly as those receiving
There is a distinct feeling of change in the air which
is only partly reflected in the forecast for growth this year,
of a range of 2.25% to 2.75%, still retained from Budget 2000.
The Treasury would have checked this forecast before the foot
and mouth epidemic with its knock on effects on tourism and
perhaps other sectors, such as transport or retailing. Such
factors may reduce growth to the bottom of the range or even
just below at 2.0%. Then the recent even harsher than expected
situation in other countries and the various knock on effects,
psychological as well as direct, on the UK have to be allowed
for. The Treasury has not done this in the Red Book where they
rely on public expenditure growth and continued private sector
A short and shallow US recession might reduce growth
here by ca. 0.5%-1.0% through the effect on exports, but this
is only the beginning; there is the position in other countries
and the reactions here to our stockmarket crash and redundancies.
Altogether there is the potential for a sharp slowing
of growth to around zero for a few quarters. The UK annual growth
rate depends on exactly when these occur. If the fourth quarter
this year was zero, growth through the year would be only 1%
and year on year growth ca. 1.75% for 2001. However these zero
quarters are more likely next year. The stockmarket is forecasting
a recession, but they do not always get it right. In this situation
we may expect short-term interest rates to fall to 5% this year.
Some expect a lower rate. Overall therefore the Treasury forecast
of growth in 2002 in line with productive potential at 2.25%
to 2.75% is clearly at risk and we could end up with a flat
year with 1.0% to 1.5% instead.
A sharper US recession is not yet expected but if it
occurs the outlook for us in 2002 is worse. The UK is quite
vulnerable because of its world status finance industry, low
savings ratio, growing current account deficit, and our tendency
to be as over-sensitive to economic weather as we are to the
weather. The rest of the EU would also be vulnerable with a
weak Euro coming into general use.
Construction receives the usual mixed message from this
Budget, good news now with bad news already built in from previous
measures. Private housing continues to benefit from the economic
growth and prosperity in the Southeast. The tax changes last
year seemed to only have an adverse effect in cool spots in
the market. At some point demand will go quiet as buyers become
concerned about prospects; at present that seems likely in the
autumn. Contracting is benefiting from the expansion of public
capital expenditure, which will continue unless there is a recession.
Public capital expenditure usually becomes the first victim
of a financial crisis. The PFI however shows a sharper decline
in new projects expected to coming to contract over the next
2 years than in previous projections.
Demand should benefit in small ways from reduction of
VAT on conversions and renovations, stamp duty exemption on
property in disadvantaged areas, and tax relief on cleaning
contaminated sites. Costs are eased by the changes to VED and
Fuel Duty, but will be raised by company car tax. Three measures
Climate Change Levy, the Landfill Tax £1 increase, and
the Aggregates Levy starting 2002/03 together give a sharp little
boost to construction costs of 0.5% to 1%.
This time there are 83 measures that flow from the Budget
process 42 of which reduce tax take. 46 were announced in this
Budget, of which 13 are pre-budget consultation measures, 16
are from the last budget or before, 19 from the PBR plus also
Council Tax. They are grouped, listed and assessed below.
Personal Taxation: Incomes
1. Personal Allowances are indexed in line with rpi or marginally
above, e.g. the single persons allowance rises by £150
to £4,535, or 3.42% worth £33 per year at basic
rate. Allowances include the Children's Tax Credit for the first
time of £5,200 worth £520 per year. In all these
increased reliefs reduce tax by £2,450 mn in 2001/02.
2. The Lower Rate Band is increased by £360 to £1,880,
23.7% worth £43.20 per year; other bands are indexed for
rpi. The Higher Rate Band begins at £29,400 plus allowances,
a £1,000 or 3.5% increase, worth £180 per year.
These changes reduce tax by £1,300mn in 2001/02.
3. Employee NICS have their lower limit aligned with tax allowances
reducing tax take by £1,200 mn in 2001/02 but the upper
limit rises to £29,900, £575 per week with an increase
of £200 per year for those affected, raising an extra
£560mn. They are also indexed reducing, tax take by £430mn.
The overall change is a reduction of £1,070mn.
4. Company car fuel scale charge increased, tax take rises by
£50 mn per year.
These direct personal tax changes reduce overall tax take
by £3,540 mn in 2001/02. However actual income tax paid
is projected to rise by £4,800 mn and total social security,
including employers, rises by £2,500 mn in 2001/02 from
previous changes, growth and inflation.
Personal Taxation: Savings and Assets
5. Council Tax increases by an average of 5.76%, £800mn
to a projected £14.7 billion in 2001/02. Projections underestimated
CT, by £300mn in 2000/01 and £200mn in the prior
year. Also average increases have been reported in the press
as above 7% this year.
6. Stakeholder Pensions are to begin with tax relief of £600mn
in 2001/02 projected to rise to £2,150mn by 2003/04.
7. The ISA £7,000 tax-free limit is for 5 years reducing
tax take by £20mn in 2001/02.
8. The Capital Gains Tax exempt limit is indexed rising by £300,
4.2% to £7,500, if you make any.
9. The Inheritance Tax exempt limit is indexed rising by £8,000
to £242,000, tax take reduced by £40mn in 2001/02.
10. Stamp Duty will be removed from property transactions in
disadvantaged areas, reducing tax take by £60mn in 2001/02.
11. Unapproved share options, tax take rises by £200mn
12. Employee Share Ownership is given stamp duty exemption,
no tax reduction in 2001/02.
Total tax on personal assets and savings rises by £280mn
in 2001/02 as a result of these measures. Total tax in this
sector is estimated at £27.2 billion in 2000/01 and is
projected at £27.5 billion in 2001/02, a rise of only
£300mn. However last tax year the projection was underestimated
13. VED on cars is reduced by increasing the lower rate to
1549cc with the rates frozen the tax take is reduced by £430mn
14. Reformed VED on lorries, a complex system, reduces tax take
by £105mn in 2001/02, plus the VED rebate reducing tax
take by £160mn.
15. VED on tractors, and various other vehicles is removed,
tax take reduced by £15mn in 2001/02.
16. Fuel Duty is cut by, u-low sulphur petrol 2p litre, u-low
sulphur diesel 3p litre and various other adjustments, so tax
take is reduced by £1,140mn in 2001/02.
17. The reform of General Betting Duty operating from January
2002 reduces tax take by £45mn in 2001/02 rising to £145mn
in the following year.
18. Alcohol Duties are frozen, tax take to rise by ca. £100mn
in 2001/02 with rising wine consumption.
19. Tobacco Duties are indexed at 1.8% adding ca. 5.8p to a
packet of cigarettes. This is to raise an additional tax take
of £125mn in 2001/02. However it has been estimated that
a fifth to a third of cigarettes in the UK are not tax paid,
with a loss of duty of ca. £3.75billion per year. As a
counter measure it will become a criminal offence to trade in
tobacco without a duty paid pack mark from July 2001.
20. A variety of changes are made to VAT. They include raising
the registration level by £2000 to £54,000, further
widening of Zero rating on vehicles for disabled people and
on children's clothing, VAT recovery for museums with free admissions,
the rate on children's car seats reduced to 5%, a grant scheme
to reduce the rate to 5% for repairs to listed buildings that
are used for worship, and simplified collection for SME's. There
is also to be a reduced rate for renovation of housing empty
for 3 years or more, and extended scope for reduced rate on
conversions. Together they reduce tax take by £140mn in
21. The increased in Landfill Tax of £1 to £11 per
tonne starts in 2001/02 raising an extra £30mn as reported
in Budget 2000.
22. Air Passenger Duty restructuring begins reducing tax take
by £80mn in 2001/02.
Total indirect tax changes reduce tax take by £1,880mn
in 2001/02 including item 21 above. Actual tax take is however
projected to rise by £2.3billion.
Four significant changes from previous Budgets begin. They
are listed below.
23. The Climate Change Levy begins raising £1,000mn in
24. The repayment of the Climate Change Levy via reduced Employer
NIC's begins reducing the rate by 0.3% and lowering tax take
by £1,050mn in 2001/02. However this reduction is 0.1
%, or £350mn less than earlier stated due to changes to
the CCL. A further reduction of the NIC rate by 0.1% is due
in 2002/03 unrelated to CCL.
25. Abolition of Withholding Tax on international bonds and
foreign dividends begins reducing tax take by £400mn in
26. Enhanced Capital Allowances for Energy Saving Technologies
begin reducing tax take by £70mn in 2001/02.
27. Additionally Business Rates rise by £300mn, 1.74%
to £17.5billion in 2001/02.
There were some further 10 minor measures, 8 from this Budget,
which reduce tax take by £65mn in 2001/02. Two relate
to relief for cleaning contaminated sites they reduce tax take
by £50mn in 2001/02.
Despite these reductions Business Taxes are projected to actually
rise by £7.75billion in 2001/02 to £89.6billion
due mostly to a sharp increase in Corporation Tax yield.
Expenditure - Social Benefits
28. Child Benefit stops and is succeeded by Children's Tax
Credit, which is in turn increased by £1.50 to £10
per week. The net additional cost over Child Benefit is ca.
£650mn in 2001/02. Further changes increase the net additional
cost to ca. £910mn in 2002/03.
29. Working Families Tax Credit is increased and extended in
several ways, cost £290mn in 2001/02, rising to £345mn
in the following year.
30. Child Premia for various benefits increased by £1.50
per week, cost £120mn in 2001/02 rising to £245mn
in the following year.
31. A Maternity Benefits Package including 6 items is introduced
with nil cost in 2001/02. By 2003/04 the cost is £490mn.
There is a minor adjustment to another maternity benefit, cost
only £10mn in 2001/02.
32. The Disability and Carers Package begins, substantially
up-rating 3 benefits, cost £195mn in 2001/02.
33. The Pensioner's Package consisting of £5 per week
on the State Pension for single pensioners, an up-rating of
the minimum income to £92.15p for single pensioners and
pro-rata for pensioner couples. These apparently modest increases
cost £1,790mn in 2001.02 rising with further real increases
to £2,440mn in the following year.
The total cost of these measures is an increase in expenditure
of £3.1billion in 2001/02 rising, to £4.0billion
in 2002/03. Total expenditure on Social Security, as stated
in the Budget, plus various tax credits, continues to bound
upwards, as follows, 2000/01 plus £3.6billion to £104billion,
2001/02 plus £8.23billion to £112.23billion, 2002/03
plus ca. £6billion to above £118billion with inflation
adjustment on top. These figures also substantially understate
total expenditure as defined in the National Accounts pub. ONS.
Other Expenditure Measures
34. Health is to receive another £1billion spread over
three years as topping up of rapid growth. This falls £360mn
in 2001/02 with £355mn and £290mn in the following
years. In the context of total health spending of around £50billion
this is small beer.
35. Education receives an identical amount but spread, £290mn
in 2001/02, followed by £330mn and £380mn.
36. The Home Office also gets a top-up of £70mn for crime
and drugs rising to £110mn and then £155mn.
37. Two other interesting changes are the carry forward of £1billon
under-spent in the last financial year and a reduction of £1.73billion
in the contingency margin together allowing this extra to be
spent in 2001/02.
Sources: The Budget Speech, The Red Book and associated
papers. Note ca. is used wherever exact figures are not given
in the sources and some estimation is used.
A. Lindley 25.3.2001
Andrew Lindley is an analyst for the construction industry.
See previous year's report: click