What Will the Chancellor Do This Week?

The headline this Chancellor always wants remains: "We are all in this together". This Budget looks like being a substantive speech. But with the final package still to be agreed the spin doctors will be gearing up for overdrive with their 'freshly baked' rather than 'warm' words.

The Coalition has been fretting for the past few weeks about Budget headlines like these:

"Osborne attacks middle class perks"

With access to child benefit for middle earners under threat and the future of pensions tax relief barely out of the headlines, traditional Tory voters will have been reading their Daily Mails rather nervously recently.

The negotiations for this Budget are going right down to the wire with the final meeting of the quad - Cameron; Osborne; Clegg and Alexander - due to take place on Monday morning. It rather reminds me of the last few Labour Budgets which kept government printing press working on overtime.

There was always a slightly 'just baked' warmth to the Treasury's Budget documents under Labour - and it looks like we will get the same 'warm glow' next week from the Red Book.

So here is what we at Cicero are looking out for next week.

Raising the personal tax allowance to £10,000 is a goal for the Coalition this Parliament, but the Liberal Democrats having been lobbying hard for faster increases in the allowance to bring immediate release to lower-income families. The Treasury is exploring how this could be affordable, and if a way can be found this will be implemented. It would be a massive headline on the day.

The government will also publish figures in the Budget from HMRC showing how much tax the 50p rate is raising, which reports suggest will turn out to be in the millions rather than billions. It seems that Osborne is now set on abolishing the 50p rate, as long as concessions to the Liberal Democrats over the personal allowance or a new wealth tax can be agreed. Don't be surprised though if we only see a reduction to 45p, rather than a return to the former rate of 40p.

Osborne will announce a plan to cut Corporation Tax to 20% in the medium-term, on top of the current plan to bring the rate down to 23% in this Parliament. This might attract some businesses back into the UK but watch out for any business reliefs being axed along the way.

The government has been consulting on the possibility of introducing a General Anti-Avoidance Rule (GAAR), and this Budget will unveil plans and further consultation on a GAAR of some kind, likely keeping it narrowly focused in line with Graham Aaronson's review on the subject.

Pension funds and asset managers have been relatively quiet on this subject - but it may well affect their future investment strategies. I'm not saying this will be like Gordon Brown's 1997 attack on corporate pensions - but do watch it over time.

Action to tackle other forms of tax avoidance, such as stamp duty land tax avoidance and manufactured overseas dividend regimes, given the cross-party agreement opposing aggressive tax avoidance, measures to tackle these are likely to be unveiled.

As calls were raised in Conservative circles for the abolition of the 50p tax rate, their junior coalition partners responded that it would have to be replaced by some kind of tax on wealth, preferably a 'mansion tax' on the most valuable properties - which received the backing of the Liberal Democrat leadership. Such a tax is being strongly opposed by the Conservative grass-roots, and there are significant concerns about the feasibility of a mansion or tycoon tax. A consultation may be launched on a new wealth tax as a compromise.

The possibility of merging Income Tax and National Insurance was raised at the 2011 Budget, and this year the government will set out the next steps on this plan. This will likely keep the contributory National Insurance rate for now, but propose reforms aimed at making the system simpler and more efficient.

The government will publish its response to the Office for Tax Simplifications reports into employee share schemes, pensions and small business tax.

Many businesses have claimed the UK is falling behind internationally in terms of infrastructure investment due to a lack of tax allowances covering them. The government is therefore likely to make some announcements around allowances for this and other capital investment as it seeks to encourage growth and help business. But this is where government needs to get a move on - time is ticking on making this happen in their first term.

Speculation has been rife that the Chancellor will look to higher-rate pensions tax relief as an area in which savings can be made in order to help balance the Budget. Abolishing higher-rate relief is long-standing Liberal Democrat policy and could well provide them with a "win" in behind-the-scenes negotiations. The chances of this are all the greater if the 50p tax rate is axed, as some are predicting. However, rather than abolish the 40 and 50 per cent rates of relief altogether, Osborne may well look to further cutting the annual allowance on which relief can be claimed from £50,000 to £40,000 or even £30,000. He has form in this area and may see it as an acceptable compromise as it still provides an incentive to save.

Moves towards a flat rate State Pension seem unlikely in this Budget, unless the Chancellor is planning a major surprise. However, the Office for Tax Simplification has suggested in a recent report that income tax on state pensions be scrapped. HMRC estimates that some 5.6m on the basic state pension pay income tax - exempting the state pension could save them around £1,000 per year. The Treasury are due to respond to this report in the Budget, but a formal announcement will likely not come till later in the year.

Plans for auctioning off next-gen spectrum allocations for 4G continue to lumber on and Ofcom and government is no closer to realising the several billion pounds this process should generate. The long-awaited sale of the taxpayer's stake in Urenco the uranium processing company will also release a sizable windfall for the Treasury but it will be that, a windfall. We should look to the Chancellor to focus more on infrastructure as a sustainable way of leveraging the UK's assets and see limited scope for further sales of government-owned assets.

It looks increasingly likely that the government will need to borrow anywhere up to £10 billion less than forecast. In any normal political cycle the temptation would be to use this to give further incentives, increase spending or fund a reduction in the tax burden. These aren't normal times.

Whilst there is a slim chance the Chancellor may use a sliver of this to offer relatively light relief he is much more likely to take this unforeseen but very welcome opportunity to move closer to eliminating the structural deficit as quickly as possible. This would be the right move.

The headline this Chancellor always wants remains: "We are all in this together". This Budget looks like being a substantive speech. But with the final package still to be agreed the spin doctors will be gearing up for overdrive with their 'freshly baked' rather than 'warm' words.


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