Budget 2009: How it affects 20-somethings
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- ITN
Budget 2009: How it affects 20-somethings
Economic analyst Nilesh Shah from Blick Rothenberg accountants assesses Alistair Darling's performance. This was a budget that was trailed as one that will define the future of a generation to come. The Chancellor was looking to give the country confidence that we are in good hands and the Labour Government will provide the leadership to take us out of this recession and protect jobs. In reality the Chancellor delivered a very unconvincing speech looking like someone who did not believe his own forecasts. The borrowing figures for the current year are a staggering £175bn, and total over £600bn over a four year period. Although there are some increases in taxes, it is not clear how this debt is going to be reduced in coming years. There is a concern that the generation coming up will foot a large part of the bill to repay and fund this borrowing. Coupled with this was the prediction from the Chancellor that although the economy will shrink by 3.5 per cent in the current year, it will grow by 1.25 per cent next year and then by 3.5 per cent year-on-year. Most commentators, including the International Monetary Fund, agree this is a rather optimistic prediction. Its relative accuracy is important for all of us as any growth in economy affects the level of income the Chancellor gets in the form of taxation. A small miscalculation in the Chancellor's predictions means the borrowing figures will be even worse. The Chancellor spent the first half hour of his speech telling us why this is a global problem and that the UK is in fact in a better position than many other developed countries. There was also plenty of rhetoric on how he has taken tough decisions when they needed to be made. He wanted to reassure us that he was looking to invest to grow out of the recession rather than looking to reduce spending and reduce the borrowing requirements. Inflation is falling and RPI is currently at minus 1.5 per cent in the current period and expected to get back to zero in the next year. The reduction in mortgage rates and general falling in prices is, according to the Chancellor, leaving us all with higher disposable income. This in itself is apparently leading to increased spending and helping to stimulate the economy. Let us look at the detail. There was great play of help for the young, defined as aged below 25. For the unemployed in this category the Chancellor is offering a job or training. This has to be positive news although it remains to be seen how effective this scheme, added to many other similar schemes, will be. It is to be hoped that as the young get trained, the economy recovers and they are able to find a job. In addition, help for the young also comes in the form of the extension of the stamp duty exemption for homes costing less than £175,000. This is helpful but it will take some time for the cost of homes in this country to align themselves to a value that allows first time buyers to benefit from this. Also, there needs to be general confidence in the economy for people to want to go out and take a mortgage to buy a property. The Chancellor also copied the scrappage scheme announced by a number of other European countries. Anyone scrapping a car over ten years old will get a credit of £2,000 from the Government if they buy a new car. This of course is to try and stimulate the car industry but many commentators are of the view that, unlike Germany which has its own car manufacturing industry, we are helping manufacturers from other countries by the introduction of this scheme. The Government had already announced an increase of £440 in the personal tax allowance and this will be worth about £7 per month for a basic rate tax payer. The increase, for the second year running, is a little higher than the rate of inflation. There is some additional help now for the increasing numbers of grandparents who help with childcare for their grandchildren. The help is in the form of financial assistance. Considering the Chancellor wants us to spend so we can get out of the recession, he has increased the tax-free allowances for savings - ISAs to encourage savings. The limit on these has stayed constant at £6,200 for some time but has now been increased to £10,200. This however is for those 50 or over in the current period and for everyone from next year. So, if you can afford to save and are earning reasonable interest by next year, this can be beneficial. For those relying on their savings for additional income, there was not much help. So what about the stimulus? The Chancellor announced the setting up of a carbon budget to invest in new technology and further funding for new power stations. There is also an additional £500m of new housing. The total of additional funding is important but not significant relative to the stimulus that is really needed. This falls well short of what the Government had indicated it would do and, with such schemes, it is never clear how they are implemented or effective. The construction industry will feel let down. There has been some help for businesses. The losses incurred by businesses can now be carried back fro a period of three years, thereby obtaining a repayment of tax if paid in those periods. This will help with cash flow but not quick enough as such claims will not be submitted for some time. There was also an announcement to increase the tax relief on capital expenditure. All in all small measures and not really what is needed. And, who is going to start paying for the borrowings and the spending? In some ways, it is again down to Joe Public. There has been an increase of 2p cigarettes and 2 per cent excise duty on fuel. Other than this it the well-off, defined as earnings over £150,000, who will pay. The Chancellor had already announced the scrapping of personal allowances for those earning over £140,000 and reducing by half those earning over £100,00 but less than £140,000. This is now going to be scrapped for all earners over £100,000. In addition it had already been announced that those earning over £150,000 would, from 2011, pay tax at 45 per cent (as opposed to the current 40 per cent). It has now been announced that the increase would be brought forward to 2010 and the rate will in fact be 50 per cent and not the 45 per cent previously announced. If one now adds National Insurance to this, anyone earning more than £150,000 will, on the amount above this figure, pay over half of their income in taxes. This is not where it ends. From 2011 those in this income category will have the tax relief on their pension contributions restricted as well. It is not clear at this stage how this will work. In conclusion, this Budget was a disappointment. It should have been a Budget for a recovery. The Government's finances show that they do not have room for the spending they themselves said was required. At the G20 summit recently there was a spat between the UK on the one hand and France and Germany on the other. The UK was arguing for a significant economic stimulus whilst Germany and France were arguing they could not afford to borrow any more to do this. Well, we seem to be in the same place now. It is to be hoped that the Chancellor's projections for economic growth are correct so that the level of borrowing can go down. If not, we are going to be left with a generation that will be paying off debt created from mistakes by people and events they had no control over.
ITN | April 22, 2009
