Pre-budget report: Ask the expert

The Chancellor made his pre-Budget report to MPs on Wednesday against a gap between tax revenues and public spending.

He admitted that the budget deficit will be £10bn larger than he previously thought.

Some predict that taxes will have to rise to meet the growing budget gap.

You put your questions to tax expert Anne Redston from Ernst and Young.



Transcript:


Newshost:

Welcome to this BBC Interactive forum, I’m Rebecca Pike. Gordon Brown has delivered his pre-Budget report against a background of a growing gap between tax revenues and public spending. He also said that the economy is on course to grow at 2.1% this year, and 3% to 3.5% next year.

But The Chancellor also admitted that the government budget deficit will be £10bn larger than he previously thought. Some predict that taxes will have to rise in order to meet spending plans. The Chancellor pledged efforts to bring more children out of poverty, but also warned of "tough choices" ahead.

I’m joined by Tax expert Anne Redston from Ernst and Young. We’ve got lots of questions to get through but first of all can I ask you what is your overall reaction to this pre-budget report? Was it what you expected?


Anne Redston:

We were expecting that the Chancellor was going to do something to fill the black hole. So we were expecting that he might put up VAT, he might perhaps put up national insurance contributions and he hasn’t actually done any of those things. So I think the bad news is some way down the road.

What he has done is he’s made some changes to childcare, he’s made some changes to tax avoidance. There are probably some useful changes to the pension proposals he had previously. But the big, big changes we think he’s going to have to put forward at some point in order to plug the gap – we simply haven’t seen them yet.


Newshost:

Because he’s talked about this £37 billion – he’s actually come straight out and admitted it today for the first time. That’s a big gap of £10 billion over what he’d expected. What kind of tax rises, if any, are we going to see after the election, if he is indeed storing them up?


Anne Redston:

Well he would make that much money if he put VAT up to 20%, that would be just the right amount.


Newshost:

Is that likely?


Anne Redston:

In Europe people are paying 20% VAT. So we are low relative to the European competition and he made quite a lot of play in his speech about comparing us all the time to the Euro-zone – how much better we’re doing than Europe. So I think he probably feels he has flexibility on the VAT rate. I don’t he will do it until after the next election – assuming he gets in of course. If he does get in I think he will do something fairly quickly to plug the hole and hope that by the following election, people will have forgotten that they’re paying more for everything because it’s an indirect tax.


Newshost:

So how’s this pre-budget report actually going to affect people. I’ll just go on to one of the e-mails - Karen UK asks: As someone about to have a second child and facing childcare bills of over £1000 a month, when will making all childcare become tax deductible?


Anne Redston:

Well I think not under this government. What we’ve seen in this particular PBR is two things: he has said he’s going to give £1 billion to families on low incomes with children. And so people who are getting child tax credit will see their child tax credit go up by about 13%. So that’s a significant increase – well above inflation.


Newshost:

And that is new today?


Anne Redston:

That is new. He had always said that he would increase the tax credit amounts – he would index them up with inflation. What he’s done now is much more than that for this group of people – lower income families with children.

The second thing he’s done – and he announced it the budget as something that was for everybody with children – he said that everybody with children could now have employer-provided childcare free of both tax and national insurance.


Newshost:

We’ve had an e-mail from Alpesh Patel asking: Will there be a rebate on nursery costs? Is that what you’re talking about?


Anne Redston:

Well it would be much easier if there was a rebate on nursery costs and as he announced it, it sounded like great news – this is what everyone has been waiting before – because childcare is the one impediment to people going back to work.

But what he then went on to say in the small print of the press releases is that this will be capped at £50. And anyone who thinks that you can get childcare for a family for £50 a week – maybe Gordon has some special arrangements – but most people’s childcare costs a lot more than £10 a day and that is not per child even. So for most people, they are not going to see any benefits from that. It looks good, it sounds good.


Newshost:

He’s selling it very highly isn’t he? You don’t think it will affect people?


Anne Redston:

No. In fact for many people, particularly further up the income scale, it may actually cost them more because previously all childcare provided by your employer was free of national insurance contributions and now that too will be capped at £50 per employee.

It’s going to have a really big impact on areas like the NHS where they have very good employer-provided childcare in hospitals to get their nurses and doctors back to work. And so you will see that their costs, for those nurses and doctors, will go up as a result of this not go down. It will have opposite effect from what he’s hoping.


Newshost:

Now what did he say about pensions? He’s alluded to it – there’s been a lot in the newspapers about this £1.4 million pension pot that will be taxed at 60% after that. Did he confirm anything?


Anne Redston:

He said he was going to consult on that. But in the paperwork that’s just come out, it would seem that he has gone further than that. In the paperwork that’s come out in the discussion document, he has said that the current £1.4 million will stay he thinks, subject to a review by the National Audit Office. So that he’s actually asked for some independent view on that.

What was going to happen originally was that amounts greater than £1.4 million would be taxed at the penal rate of 60%. So for every pound you had in there, you would only get 40p. back. It now seems that in the document, he’s going to drop that to 55%. That may still seem penal to most people but it isn’t as high. So there seems to be some shifting of ground.

The other curious thing is that it appeared only to apply to personal pensioners. It doesn’t seem to apply, for instance, to chancellors and prime ministers who have pensions funded by the taxpayer. So people estimate that Tony Blair’s pension is worth £2.8 million – twice this cap – but for some reason this £1.4 million limit doesn’t seem to be going to apply to pensions provided by the taxpayer but only pensions saved for by the taxpayer. So that may be an area which will get looked over the coming months.


Newshost:

Steve, London asks: Could the change from RPI to what’s known as HICP – the inflation figure used by the rest of Europe, not us at the moment but from today us as well – could that affect index-linked finances, such as pensions?


Anne Redston:

The Chancellor says no. The Chancellor says that pensions and personal allowances and I understand, although he didn’t say this, that national savings will continue to use the old method.


Newshost:

Why is that?


Anne Redston:

I would say it’s probably so that people get what they expect. The new measure is different – it would have different effects on different things. People have expected that pensions will go up by RPI and that national savings that people have invested – especially elderly people – quite a lot of money, if that were now being linked to a different measure, people might feel that they had been cheated a bit. So I think he’s right to keep it linked to the RPI.


Newshost:

Still on the pensions theme, David Slater, Hyde, U.K asks: Will the proposed changes to pensions schemes, in terms of companies being forced to underwrite the funds, force final salary schemes to be universally dumped due to the potential costs?


Anne Redston:

Well he hasn’t commented on this in the PBR. My own view is that there are some very big issues down the road for final salary schemes. There’s nothing here to make it easier for final salary schemes. There may be, as he continues to look at a simplification of pensions, the red tape around the running of final salary schemes will hopefully get less. But the real issues about funding a scheme, we haven’t seen anything to help, I’m afraid.


Newshost:

Vish, UK asks: Why won’t the Chancellor bring in a 60% tax bracket for people earning £50,000 or more and then spend this money on building affordable housing and for tuition fees?


Anne Redston:

I think the short answer to that is because he promised he wouldn’t. When the Labour Party was elected, he gave a commitment that he wouldn’t put tax rates up. He did get round that last time by putting national insurance up by 1% on all income which is really tax in all but name. But I think if he were to introduce such a big rise, people would feel that he had broken that very clear manifesto commitment. So that’s why I don’t think that will happen.


Newshost:

Robin Holman, Farnham asks: Should the inheritance tax threshold be raised to reflect increasing house prices?


Anne Redston:

I would say yes. The Chancellor has obviously said no.


Newshost:

Why?


Anne Redston:

Because by doing very little with the inheritance tax threshold he collects a lot more money without appearing to raise taxes. So by almost freezing – just very slowly moving up the threshold – as house prices go up much faster than that, you trap more and more houses in this without people realising. And also you’re dealing with people’s after-death assets. So in terms of votes it probably isn’t an area he’s very concerned about. People aren’t going to change their political party, their vote, because of this. It isn’t something that is critical in terms of voter allegiance – I am sure he won’t do anything about it.


Newshost:

Alan asks: Isn’t some tax relief for savers a good idea? The government want us to save more but does little to encourage us. It's hardly surprising that a lot of people take the view that you might as well spend it while you have it. Hence all the debt problems we’ve been experiencing.


Anne Redston:

The Chancellor, I think if he were here instead of me, he would say he has done things for savers – he’s retained ISAs, he’s put together the child trust fund which he announced in the last Budget, which will allow you to save money for children very tax efficiently.

I think there is an opportunity, if not for savers then for investors in this budget, in that he has announced the introduction of something called real estate investment trusts. That would allow savers, instead of putting their money directly into a bank or a building society, to invest in the property market in a much more flexible way than having to buy a whole property. So you could perhaps put £10,000 into one of these investment trusts or £1,000 or £100 and you would combine with lots of other people’s small amounts of money and as the property market moved, you would be able to gain benefits from that. So it’s another way of investing money. At the moment you either have to become a property owner or have money in the bank. So I think that is an innovative way of encouraging people to invest and save. So I think there is something there for savers.


Newshost:

What other kinds of tax relief did he allude to today? There was some on research and development in the film industry, wasn’t there?


Anne Redston:

Yes, he has expanded the relief for research and development. On the film industry he did say he was being helpful. But in the small print, he’s making it clear that the film investments are going to be subject to some more anti tax avoidance rules – to stop people getting a permanent benefit from the reliefs he’s given.

The reliefs that are available for films are what’s called a deferral – say you invest in a film and you get some tax relief today, tomorrow and the next day and for a few years and then the tax is clawed back. And what he’s trying to stop is people keeping the tax relief. So there are some tax avoidance for films amongst other things in this budget. I think in every pre-budget we expect it to be an opportunity for the Government to stop some tax avoidance and we have seen that with films this time.


Newshost:

It’s all rather complex though with this current Chancellor. John B, UK asks: How about a simplification in the absurdly complex taxation system? This will be cheaper to administer so for once those of us who pay five figures in direct tax each year can get a reduction instead of paying more and receiving less.


Anne Redston:

I couldn’t have put it better myself. I think we have an amazingly complex system where many people are giving money to the Government and getting it back with the other hand. If you had a tax threshold of say, £10,000, he would take so many people out of the tax bracket – they probably wouldn’t need to claim tax credits, they would simply pay less tax to start with. I think there’s an enormous appetite in the population for a simpler system. But we are not going to get it with Gordon because Gordon believes in micro-managing the tax system. So I’m afraid we’re going to have to wait, those of us who think we need a simpler tax system.


Newshost:

What about these 147 tax measures that he said he was going to repeal?


Anne Redston:

Well that would be great – I’m all for deregulation of the tax system. I suspect though at the end of PBR, we will see more than 147 changes, so I’m not sure who’ll be ahead overall.


Newshost:

And to really know what they are, we have to read to read the pre-budget report rather closer.


Anne Redston:

You do and the legislation and the documents which haven’t come out yet which will follow it. So I think it’s watch this space because the small print and the very small print is where a lot of the detail is.


Newshost:

And overall there was nothing in this budget – no rabbit out of the hat, as they like to call it – that surprised you?


Anne Redston:

There was nothing very unusual in this budget. There were things we thought would come through – we thought for instance there would be something on company vans which was indicted, there would be something on foreigners and their tax positioning in the UK – there was nothing on either of those. So maybe at the next budget we will see more than one rabbit.


Newshost:

Anne Redston from Ernst and Young thank you very much. I’m afraid that’s all we’ve got time for. From me, Rebecca Pike and the rest of the interactive team, goodbye.