TO THE PRE-BUDGET REPORT IN GENERAL
John Hawksworth, head of macroeconomics, PricewaterhouseCoopers said:
“With recessionary wolves prowling the high street, the Chancellor had
little choice but to load Prudence up with Christmas goodies and point her
in the general direction of the pack. If her sacrifice is not to be in vain,
the Bank of England needs to follow up with another big interest rate cut
next week.
“In the medium term, we would have preferred the Chancellor to have gone even
further in his austerity drive by announcing a real freeze in current
spending over the three years to 2013/14. With public spending still assumed
to show 1.2 per cent per annum real growth over this period in the Treasury
projections, taxes in 2011 and beyond may need to rise even further than the
Chancellor announced today in order to put the public finances back on a
sound footing in the medium term.
“Even on the Treasury’s possibly optimistic projections, the current budget is
not expected to return to balance until 2015/16, which shows just how long
and painful the process of getting the public finances back on track will
be.”
Ben Wilkins, HRS director, at PricewaterhouseCoopers said: "This
could have a real impact on industries where there are more opportunities
for talent to mobilise and move elsewhere - for example, knowledge-based
industries such as technological or financial services. As a result, UK
companies that rely on hiring high-earning talent will have to think
increasingly about how to attract top performers."
Miles Templeman, Director General of the Institute of Directors said:
“The scale of the fiscal stimulus is what the IoD has called for, but we
have considerable doubt that the 2.5 percentage point reduction in the VAT
rate will stimulate consumer spending as much as the Chancellor expects.
“Fiscal stimulus in the short term needs to be matched by fiscal restraint in
the long term. The best way to restore the public finances is to restrain
public spending instead of increasing taxation. The proposed 45 per cent
income tax rate will raise little. It is more about messages than about
economic reality. Anything that potentially harms our competitiveness is a
danger. The first sector of the economy to be dismayed at this proposal will
be the City of London, which is already under pressure from foreign
financial centres.
“It is also important to recognise the real difficulty for many small
businesses, which is access to credit. These facilities need to be easier to
use. We look forward to the new schemes to provide finance directly, but
again these need to be straightforward if they are to be effective.”
Howard Archer, Chief UK and European Economist, IHS Global Insight
said: "Given the very substantial downside risks to an economy
undeniably already in serious recession, there is a justifiable case for the
£20 billion stimulative package over two years that the Chancellor has
announced even though we will pay for it later. While the significant tax
rises, increased national insurance contributions and very tight control of
public spending that will be needed once recovery is firmly established will
clearly limit the strength of the upturn, there is the very real danger that
the recovery will start much later and from a much worse position unless
serious fiscal stimulus is delivered now in tandem with sharply lower
interest rates.
We think the economy is likely to contract by 1.5 per cent in 2009, and we
suspect that growth in 2010 will be limited to 0.8 per cent. The main impact
of the Chancellor's measures have been to stop us from significantly
downgrading our GDP forecasts further, which we had been considering. We see
the package as more limiting and reducing the downside risks to the economy,
rather than significantly boosting growth prospects."
Lisa Harker, Institute for Public Policy Research Co-Director said: "In
tax terms this was the most redistributive budget statement of the last
thirty years. By introducing a higher rate of tax, raising national
insurance contributions, rebalancing and increasing personal tax allowances
and enhancing child and pensioner benefits, the tax burden will be shifted
away from those who can least afford to shoulder it.
"The insulation measures are good news for people struggling to pay
household energy bills this winter and will help cut carbon emissions but
the cap on Vehicle Excise Duty on the most polluting cars is a retrograde
step.
"These changes are designed to protect the least well off during economic
difficulties but whether they amount to a full prescription for a fairer and
more sustainable future remains to be seen."
TO VAT
Charlie Mayfield, chairman of the John Lewis Partnership, said the
employee-owned department store group, which includes Waitrose, would pass
on the VAT cut as soon as possible.
Stephen Robertson, direcor general of the British Retail Consortium,
said: "This is a modest but welcome boost for hard-pressed households
... shops will cope, but implementing a new VAT rate in just a week is a
practical nightmare for customers and retailers at their busiest time of
year. IT system changes, replacing shelf labels and stickering-over prices
on packs will be a mammoth and costly task"
Mike Lambourne, VAT partner at Ernst & Young said: "The
temporary decrease in VAT announced today is clearly intended to stimulate
spending and ease pressure on consumers’ pockets. However, with large
elements of household expenditure such as essential food, domestic fuel and
power, children’s clothes, books and council tax not subject to the top rate
of VAT, the impact on lower income families may be muted and it will be
families with more disposable income who will feel the full benefit of these
changes.
"The Chancellor will be relying on retailers to immediately pass on these
cuts to their customers but, given the need for computer systems to be
changed, this may well be wishful thinking.
"This might give a particular boost to internet retailers who can change
prices without re-ticketing all items.
"The reduction will also be welcome news for banks and insurance
companies with a direct impact on their bottom line."
George Johns, UK economist, Barclays Capital
Theoretically, the impact consumer price inflation should be simply linked to
the proportion of the basket which is liable for VAT at the standard rate.
Fifty seven percent of the RPI basket is “VATable” at the standard rate and
therefore a 1pp reduction in VAT will reduce RPI inflation by around 0.6pp.
The portion of the basket liable for a standard VAT rating may seem quite low,
but reflects firstly the fact a number of housing-related components of the
index (e.g. mortgage interest payments, council taxes and depreciation) do
not incur VAT. It also reflects that fact that there are a number of other
goods and services within the basket that are either “zero-rated” or subject
to a reduced rate of VAT.
The Chancellor also announced increases in alcohol, tobacco and petrol duties
to offset the impact of the VAT reduction. As a result, we estimate that, on
the assumption that retailers pass on the reduction in VAT in full to
prices, the 2.5pp reduction in VAT will knock 1.1pp off RPI
TO AIR PASSENGER DUTY
John Manning, UK tax and environmental leader at PricewaterhouseCoopers said:
"Air passenger duty (APD) is to be reformed rather than changed to
aviation duty per flight. APD was always regarded as a very blunt instrument
in reducing carbon emissions. The former proposed aviation duty would have
been a tax move targeted to reducing emissions. It remains to be seen how
the new APD is linked to carbon emissions."
TO GOVERNMENT DEBT INCREASE
Catherine MacLeod, Macro Global Economist at BDO Stoy Hayward Investment
Management said: "To the extent that every other major country is
spending large amounts, the rise should not hurt the pound too much - this
is why the UK government has been so keen on pushing international action.
"More important to long term growth prospects perhaps will be the nature
of government intervention - micro management and a desire to not let any
company fail will prove more problematic."
TO BUSINESS AND INDUSTRY
John Walker, Federation of Small Businesses National Policy Chairman,
said: “This Pre-Budget Report is a sign of the importance of small
businesses to the UK economy. The Government’s Small Business Finance
Scheme, which closely resembles the Small Business Survival Fund the FSB has
been calling for, will provide a vital cash boost to businesses struggling
with rising costs and a lack of credit.
“Many of these measures, such as giving businesses longer time to pay bills
and offsetting losses, will give small businesses a welcome breather from
the taxman and allow them to concentrate on sustaining their business,
supporting their staff and growing the economy in the long term.”
Richard Lambert, director general of the CBI, said: “There are a number
of measures in this report that we have asked for that will help cashflow in
small businesses and business overall by reducing costs.
“The package comprising the small business finance scheme and loans from the
European Investment Bank should, if well and speedily implemented, give
critical help to small firms in need.
“The exemption of foreign dividends from taxation is very welcome. It will
help to stem the incentive to move tax domicile overseas."
Martin Temple, chairman of EEF, the manufacturers’ organisation,
said: “The big question is has this taken business forward. The government
had to meet three criteria with this statement in terms of being temporary,
targeted and timely. It has gone some way towards meeting the first two of
these with a range of measures to help business cashflow.
“However, in terms of being timely there are a number of factors at play
before this can be delivered. In particular, it is essential that government
takes action to ensure that the acceleration of capital spending is carried
out quickly and is directed towards ensuring that UK-based companies
benefit. It is also vital that pressure is maintained on the banks to
deliver support for lending.”
Paul Everitt, chief executive of the Society of Motor Manufacturers and
Traders, said: “The 2.5 per cent cut in VAT combined with the recent
cuts in interest rates will encourage consumer spending, impacting on both
the new and used vehicle markets. Any move to boost responsible spending is
welcome but specific action to improve the affordability and accessibility
of credit is needed if the vehicle market is really going to benefit."
Brendan Barber, TUC general secretary, said: “The Chancellor was right
to inject this extra money into the economy. He has changed the political
debate by breaking the taboo that the super-rich should never pay more tax.
“He did about as much today as he could to boost the economy but we will need
further interest rate cuts and action to get credit flowing to effectively
bear down on the recession.”
Dave Prentis, Unison general secretary, said: “This is a serious
package for serious times. Brown and Darling have shown their strength,
courage and determination to face the economic challenge head on. Their
extensive experience has kept them in tune with what the country and
business needs. And this is in keen contrast to the Tories, who seem more
like rabbits caught in headlights, bereft of ideas or solutions.”
GREEN ISSUES
John Manning, UK tax and environment leader at PricewaterhouseCoopers,
said: “Despite the economic turbulence, the Chancellor devoted a significant
part of his speech to delivering on environmental goals. However, while
there is some welcome confirmation of longer term measures to provide
investor confidence for investing in low carbon technologies - for example,
the extension of the Renewables Obligation to 2037 - the PBR does not signal
how the government will use the tax system in the longer term to either
incentivise green behaviour or penalise carbon intensive activity.
“The government continues to tinker with marginal changes, such as air
passenger duty, without giving a clear signal on how carbon will be priced
for the 50 per cent of the UK carbon economy which is not covered by the EU
Emissions Trading Scheme (ETS).”
