Budget predictions: Chancellor will have to play balancing act
So how will he achieve all of this? Well, one way of boosting activity in the near-term without raising the long-term path of borrowing is to bring forward already planned public sector spending. The Pre-Budget Report (PBR) brought forward almost £3 billion of capital spending from 2010-11 to this year and next. But there have been suggestions since the PBR that a number of capital projects have been slow to get off the ground, perhaps casting some doubts over the feasibility of bringing forward yet more.
Meanwhile, the scope for reducing borrowing further ahead via a cut in spending is also limited by the fact that the existing plans already incorporate a very tight squeeze on current expenditure after the deep cuts made in the PBR.
Real spending is set to grow by an average of just 1.1 per cent per annum between 2011-12 and 2013-14. With social security spending and debt interest likely to rise, it suggests that many government departments will see spending freeze in real terms, or even fall. Further efficiency savings on top of the £5 billion per annum identified in the PBR might be possible, but there are clear doubts over whether these can actually be delivered.
Given all of this, it seems likely that any significant shifts in discretionary fiscal policy in the Budget are likely to come primarily in the form of tax changes.
One possibility is another change in VAT after the PBR’s temporary reduction to 15 per cent. Extending the cut by another year to the end of 2010 would cost about £12 billion. But this would delay the expected surge in spending ahead of the reimposition of the previous rate and could therefore actually reduce spending and activity in 2009.
Another possibility is therefore to pre-announce a second increase in VAT at the end of 2010, perhaps to 18.5 per cent or even 20 per cent. This would have the twin attractions of both raising revenue in the future and providing a further possible boost to spending in 2010.
Widening the VAT net, which currently captures only around half of goods and services is also another option.
Other possibilities include measures to improve conditions in the labour market, such as help for employees moved to short-time working and tax breaks for employers; more measures to support the housing market, like a further extension of stamp duty; the sale of some public sector assets; and changes in the thresholds for income tax and National Insurance.
Finally, Mr Darling could turn to higher rate taxpayers again after announcing a rise in the top rate of income tax on earnings above £150,000 to 45 per cent from 2011 in the PBR.
