Leaks are coming thick and fast, giving a good indication of what the chancellor will say when he stands up in the Commons
With the UK nursing an expected deficit of more than £100bn, the bulk of George Osborne’s speech will concentrate on how to plug that hole. Overall, the chancellor is expected to tweak the balance of cuts to tax rises, but critics say he is unlikely to go far enough.
The left-of-centre think tank, the IPPR, says that ratio is currently running at 96% cuts for just 4% tax rises, while Osborne is said to be aiming for 80% cuts to 20% tax rises.
Tony Dolphin, the IPPR’s chief economist, says: “The current plans allow for practically no increase in taxes at all. By bringing in an element of tax increases – such as lowering the amount of tax-free contributions to pensions – the chancellor will shift some of the burden of further deficit reduction to the rich. But if he settles on an 80:20 ratio, the bulk of it will still be shouldered by people with lower incomes, who are beneficiaries of the welfare system and more likely to use public services.”
Among the revenue raising measures, Osborne is expected to announce a raid on pension tax relief for the wealthy. The plan is to further reduce the tax-exempt amount people can pay into their pension pots by up to a third in the hope of raising nearly £2bn. The government is said to be examining proposals to reduce the amount from £50,000 to either £40,000 or £30,000. Osborne has already cut the annual allowance on pension tax relief from £255,000 to £50,000. Another option is to cut the level of pension tax relief that high earners can claim, which stands at 50% for those earning more than £150,000 a year.
Already there has been an outcry about the proposals. Simon Walker, director general of the Institute of Directors, said: “Aggressive action by successive governments to siphon cash from the nation’s pension pots has shattered the public’s faith in saving for retirement. Further attacks on the remaining reliefs will weaken the stability of pension funds and simply restate the message to pension savers that they might as well not bother.”
Crackdown on tax avoidance
Heavily trailed on Monday, the crack-down on big-name global companies and wealthy individuals who dodge tax bills is an attempt by the government to claw back billions of pounds for the Treasury. Over the next two years, HM Revenue and Customs will see its funding rise by £154m to create a “centre of excellence” as part of a scheme to raise £10bn.
Osborne has ruled out Lib Dem calls for a “mansion tax” on homes worth more than £2m, but there is talk of a potential “son of mansion tax”. It is understood that the chancellor has been consulting on a new holding charge on properties valued at over £2m, owned by non-doms. That would help to take the heat out of London’s high-end property market, where the world’s super-rich like to park their money. He could also bring in further increases for stamp duty on high-end properties, over and above the recently introduced 7% rate on properties over £2m.
There will be no let-up in the coalition’s spending cuts, Osborne said over the weekend. To do so would mean “complete catastrophe for Britain”. The government has already said it must cut another £10bn from the welfare bill by 2016 and it is thought it will try and achieve some of this by breaking the link between benefits and inflation next April. The rationale is that benefit payments should not rise faster than wages, as that can hit incentives to move into work. Last year, for example, benefits rose by 5.2%, while wages inched up by just 2.5%. The savings from such a move are substantial. If benefits had been increased by 2.5% last year, rather than 5.2%, the benefits bill would be £5bn lower. It appears Osborne has been forced to compromise with the Lib Dems on his plans to freeze welfare benefits, and will instead announce a below-inflation rate rise of around 1%.
One (almost) dead cert, is a delay to the 3p rise in fuel duty scheduled for January. This has been seen as a particularly toxic tax for the government to raise, especially given the rural nature of many of the constituencies the coalition represent. The IPPR estimates this measure, which will be presented as a means to boost economic activity, will cost the Treasury £550m.
The chancellor will be hoping to offset disappointment at continued austerity with some measures to drive growth. Already, he has announced £5bn worth of investment in schools, transport and science over the next three years, funded by a fresh spending squeeze on cash-strapped Whitehall departments.
Osborne is also expected to reveal the first infrastructure projects to benefit from the £40bn of guarantees the government has offered to underwrite returns on privately-funded infrastructure. On transport, it is thought the government has not yet concluded discussions over a mooted, privatised roads agency; instead we are expecting hundreds of millions of pounds of investment in various new roads around the country. And the chancellor may signal his willingness to adopt some elements of Lord Heseltine’s review of growth in the regions. The central recommendation of the report was the devolution of up to £58bn of Whitehall spending to local enterprise partnerships. It is thought the chancellor is proceeding with such a plan and telling ministers to argue why they should not devolve funds.
After last week’s energy bill – which focused on low-carbon fuels – Osborne will redress the balance on Wednesday with a dramatic expansion of the gas industry. The chancellor is expected to approve up to 30 new gas-fired power stations to produce 26 gigawatts, replacing old coal, nuclear and gas plants, to the dismay of environmentalists. Friends of the Earth’s executive director, Andy Atkins, said: “The chancellor’s reckless dash for gas will send the nation speeding in the wrong direction. Rocketing gas prices are the main reason our fuel prices have soared – and experts predict they will carry on rising. Building more gas-fired power stations will condemn households to increasingly expensive fuel bills, drive away investment in clean power and undermine UK targets for tackling climate change.”
On Tuesday, the government trailed plans to revamp the much-maligned private finance initiative. PFI was a tool Labour used to finance the building and maintenance of schools and hospitals and other expensive public sector investments by asking the private sector to bear the costs, in return for regular payments from the government. Critics said the schemes were badly negotiated, allowing private companies to reap huge profits while taking little risk on the projects. Osborne’s revamped private finance 2 (PF2) will include a greater role for the public sector in every project, with the taxpayer having a seat on the board of every project company and a share of any financial returns.