22 April 2009)

Budget 2009, Building's Britain's Future, presented updated assessments and forecasts of the economy and public finances and reported on how in the face of a steep and synchronised global downturn, the Government is delivering a comprehensive and coherent package of targeted support to continue to help households and businesses, while implementing a strategy to support a strong and sustainable recovery.

Andrew Smith, KPMG Chief Economist said: “The Budget projections look like a triumph of hope over experience. Despite having to drastically downgrade his forecast for growth this year, the Chancellor still expects the economy to rebound over the next two years.

Building on the strategy set out at the 2008 Pre-Budget Report, the Budget announces targeted discretionary support for the economy through these difficult times, while continuing sustained fiscal consolidation from 2010-11 when the economy is expected to be recovering and able to support a reduction in borrowing:

* support for employment, including for Jobcentre Plus and the Flexible New Deal, and the offer of a guaranteed job, training or work placement for all 18-24 year olds who reach 12 months unemployed;

* support for business, including by extending the enhanced loss relief for an additional year and expanding HMRC's Business Payment Support Service, increasing capital allowances for new investment to 40 per cent for one year, and establishing a £750 million Strategic Investment Fund to support advanced industrial projects of strategic importance;

* support for individuals, including through an increase in the annual investment limit for Individual Savings Accounts (ISAs) to £10,200, up to £5,100 of which can be saved in cash; an additional payment alongside the Winter Fuel Payment worth £100 for households with someone aged over 80 and £50 for households with someone aged over 60;

* support for homeowners and homebuyers, including a £600 million funding package of measures to build more homes through unlocking sites currently sitting as dormant, and an extension of the stamp duty holiday for all houses costing up to £175,000 until the end of the year.

* support for the environment, including setting the world's first carbon budgets and measures to encourage energy efficiency and low-carbon growth.

The Budget also announced:

* from April 2010, an additional rate of income tax of 50 per cent will apply to income over £150,000, and the income tax personal allowance will be restricted for those with income over £100,000;

* from April 2011, tax relief on pensions contributions will be restricted for those with incomes of £150,000 and over, and tapered down until it is 20 per cent;

* fuel duty will increase by 2 pence per litre on 1 September 2009, and by 1 penny per litre in real terms each year from 2010 to 2013;

* £5 billion recoverable value for money savings in 2010-11 raising the 2007 Comprehensive Spending Review target from £30 billion to £35 billion, and in the next Spending Review period, additional efficiencies to help support the economy and front-line services, rising to £9 billion by 2013-14. The Budget sets assumptions for spending growth from 2011-12 onwards, with current spending growing by an average 0.7 per cent in real terms and public sector net investment moving to 11/4 per cent of GDP by 2013-14.

What the experts thought

“Even though Mr Darling insists that the end of the recession is in sight, we are still looking at eye-watering budget deficits and a doubling of public debt. And if the Chancellor’s growth forecasts again prove over-optimistic, the public finances will turn out even worse.

“The plans for repairing the public finances are long on ambition but short on detail. Cutting public spending has proved difficult in the past and without more detail the plan this time may be regarded as little more than an aspiration. If history is anything to go by, significant additional tax hikes will ultimately be necessary as wel", Andrew Smith, KPMG Chief Economist.

Britain has lost its attractivemness to entrepreneurial inward investment

In response to the announcements made today in the Chancellor of the Exchequer’s Budget Statement, Mary Monfries, head of tax services for entrepreneurs, private companies and private clients at PricewaterhouseCoopers LLP, said: “Britain has already lost some of it’s attractiveness to entrepreneurial inward investment since the abolition of business asset taper relief, the changes to non-domicile and residence rules and the uncertainty and lack of trust in a stable tax system these bring. Add to this a 50% income tax rate and the NIC increases already announced in the Pre Budget Report and those entrepreneurs prepared to carry the risk of setting up businesses will begin to look elsewhere.

'Buy Now, Pay Later Budget'

Chris Sanger, Head of Tax Policy, at Ernst & Young said: "This is a 'buy now, pay later' Budget with a £5bn cut in taxes this year, tax neutrality in the election year 2010 and a £5bn tax hike every year from 2011 going forward. The vast bulk of these revenues will be from the increase in personal income tax rate to 50% and the increase in fuel duty."

"We are sceptical that the higher rate increase will raise the sums the Chancellor expects. It’s not just the entrepreneurs who will find themselves less welcome in the UK but also the cash rich multinationals who could face an effective tax increase of up to 43% (depending on the amount they currently borrow in the UK) on their profits from 2010. On the positive side the Chancellor has pushed forward with the dividend exemption a rare element of good news in this Budget."

"Whoever is Chancellor after the election will be gifted a tax system less attractive to investors and be faced with a daunting challenge and unrealistic expectations on tax receipts from income tax and fuel duty."

Headline-grabbing measures that will benefit very few people

Bill Dodwell, head of tax policy at Deloitte, commented: “The Budget is full of lots of headline-grabbing measures, however, many of them will actually apply to relatively few people. This is of little surprise, given that we knew that the Chancellor had little to play with, and it is surely right that it is the individuals most in need who will benefit.

“The top rate of income tax will rise to 50% for the 350,000 people earning over £150,000, and apply from April 2010, which is a surprise. At the same time, those earning over £100,000 will lose all personal allowances - which will cost some 700,000 people around £220 per month.

“For businesses the reliefs announced are modest. The £50,000 loss relief rule will be extended for a second year - allowing loss-making businesses to recover tax paid in the three previous years. However, the refund for a company is only £10,000 - so not a huge help. There is an increase in Capital allowances for expenditure in the year to April 2010 – a measure aimed at encouraging investment. However, the net present value (NPV) is very small and, therefore, we don’t believe it will encourage extra investment. The money would have been better targeted at loss-making businesses. Disappointingly, there is no further help for businesses with empty properties.

Scrappage scheme will finance cars manufactured overseas

“The much heralded scrappage scheme will offer £2,000 to those who buy a new car, however, much of this money will end up financing cars manufactured overseas.

The 2009 Budget has exposed the real state of the public finances and the downturn in the economy. The Chancellor outlined another fiscal stimulus package for this year, but significant tax rises to come, all against the backdrop of the worst economic turmoil for 60 years and an over optimistic path to recovery, according to leading business and financial advisers Grant Thornton.

1.25% growth forecast by 2010 is wildly optimistic

Stephen Gifford, Chief Economist at Grant Thornton, says "The Chancellor's view of 1.25% growth in 2010 is wildly optimistic and out of line with the consensus. Predicting such a quick bounce back allows him to conveniently put back sorting out the public borrowing and debt until after the next election".