It was a smiling George Osborne, the UK Chancellor of the Exchequer, who presented the Coalition budget last week. He faces an uphill climb trying to make do with little cash in the till but, notwithstanding this limitation, he produced some magic with his figures by lifting the doomsday feeling. One of the magic gestures was cutting corporation tax by an additional percentage point to 26 per cent as of 1 April 2011, reducing it further to 23 per cent by 2014 and increasing the bank levy to offset the benefit banks will gain from lower corporation tax.
Some may say this is robbing the rich (read banks and North Sea oil barons) to pay the poor souls who face a second year of austerity measures and job cuts. It is indeed a lesson that our ministry ought to mimic. Why not learn from such wizardly techniques that aim to do more from less? Coalition critics have hailed this budget as a creative one, trying to produce more growth and jobs through an elusive Plan for Growth. Pundits expressed their approval, particularly the 100,000 places on a new work experience scheme, while there is extra funding to create 40,000 new apprenticeships for young unemployed. This may look like a drop in the ocean when the unemployed army is reaching the giddy heights of three million.
Another smart move was to finance a drop in fuel prices by charging a supplementary charge on North Sea Oil and gas production. This ranges from 20 per cent to 32 per cent. Will the fine print of the budget be a mirage or will the patient take the bitter medicine and be cured? Nobody knows, but at least Osborne said he will create the most competitive tax system in the G20 and encourage greater investment. The hard facts portray a different message, as the estimate for UK growth for 2011 has fallen from 2.1 per cent to 1.7 per cent. The independent Office for Budget Responsibility forecasts growth of 1.7 per cent this year, followed 2.5 per cent next year, 2.9 per cent in 2013, 2.9 per cent in 2014 and 2.8 per cent in 2015. Not bad at all, when one considers that the OECD forecast is 1.5 per cent for 2011 and 2.0 per cent for 2012. The trouble is that while the economy is expanding at an unpretentious rate, inflation has started to gallop, reaching five per cent, while unemployment will peak this year.
This will bring in further hardships at the grass root level so it is not unimaginable that further social unrest (like that which resulted when student’s fees were increased) will foment later on this year. But with mounting debts, how can an ebullient George Osborne conjure up new tricks to balance the books? Unquestionably, something has to give.
Even though the UK falls outside the euro rules, the Maastricht Treaty mandates a maximum borrowing level of not more than three per cent and public sector net debt not exceeding 60 per cent. The latter is expected to peak at 70.9 per cent of GDP in 2013-14, before declining to 70.5 per cent in 2014-15 and 69.1 per cent in 2015-16. And this is provided that the wheels work perfectly as predicted and no global events occur to slow down the show. So who, one may ask, are the winners in this budget? The answer is not long, but to start with one can include those with a steady job who stand to gain about 90p a week from the increase in the personal allowance – not enough to pay for the increase in a pint of beer. Thus one reads that the personal tax allowance is to rise from £7,475 to more than £8,105 in April 2012, while a simplification exercise has abolished 43 tax reliefs .There is a proposal to consider merging National Insurance contributions and income tax to further simplify matters.
While over 500,000 jobs will be axed from the bloated public service there has been a small pay rise of £250 for armed forces, prison, NHS, teachers and civil servants earning under £21,000.Certainly small beer for those who have to face tougher energy and transport costs. The good news for first time property buyers is an allocation of £250m to partly finance the mortgage interest. Drivers will be pleased with the cut of a penny per litre in fuel tax, along with the cancellation of the planned increase. It’s not much to write home about but savvy motorists driving SUVs may rejoice at the few pence in change that otherwise will be gobbled at filling stations. The top end of society (the fat cats) will rejoice at the corporate rate progressive tax cuts coming at a cost of £10 million. At a personal level they may also benefit from Osborne’s commissioning of a study on the 50p super-tax rate, which could eventually pave the way for its abolition. As is explained later, there has been further tightening of known tax loopholes thus contributing a cool £1bn to the common pot. Typically, a hue and cry arose when the outgoing labour government started taxing non-domiciled high net-worth taxpayers with a £30,000 pa. Now this scare tactic has been retained by the Coalition and, wonders of wonders, it is to increase if for those residing in the country for over seven years to £50,000 for those in the country for 12 years. On its own this leads to a bonanza of £200m.It is all humdrum so far and no bright spots appear in George’s wizardly tones except that a tiny spark evolved when he announced the push for new enterprises.
Briefly, there will be a new broom sweeping clean the cobwebs and excessive red tape that has hindered progress under the Labour government with the multiplicity of quangos and self-officiating agencies. The plan is to trim the hedges and weed the garden, resulting in a gain of £350m worth of regulation on businesses to be removed. The spirit is to help enterprise to grow and the early green shoots to nourish.
Perhaps this war on bureaucracy is a worn out cliché which we in Malta have been repeatedly fed at every budget speech with little to show for it at the end of each legislature. In fact, we see how the administration of funds intended to help SMEs by extending various schemes are so bureaucratic that nobody has the time to bother to claim. This has been the trend ever since MDC administered the various grants to attract new enterprises and the same culture has permeated in the new revamped Malta Enterprise cadre. Bad habits die hard. In fact, the promised venture capital fund of €4 million has never started working, even though it has been promised for the past five years. Back to UK, they have extended the small business rate relief holiday at a cost of £370m, while research and development tax credit allocated will rise to 200 per cent in April and 225 per cent in 2012. This compares unfavourably with our high corporate tax of 35 per cent chargeable to smaller companies compared to the lower rate of 19 per cent in the UK. Again, the Chancellor is not resting on his laurels and has planned the funding of 21 new enterprise zones, including new ones in Manchester, Birmingham and London, while 10 others are in the pipeline. Another smart idea is to grant new export credits to exporters and set up a technology and innovation centre plus nine new university centres. There will be an investment of £100 million in new science facilities in Cambridge, Norwich, Harwell and Daresbury. All this will be funded from the extra bank levy and one cannot underestimate the drive to repair the infrastructure with an investment of £200m in regional railways and a cool £100m to help councils repair potholes.
This compares well with our miserly budget at council level, where a mere €7.5 million allocation to repair/build 200 residential roads (for example, Tal Wej in Mosta, which has been riddled with potholes for 25 years). Finally, the Chancellor has sharpened his tools to cut down the offending CFC legislation which many perceived scared investments away. The so-called magical book Plan for growth invokes a reform of the controlled foreign company (CFC) rules next year introducing for the first time an effective 5.75 per cent UK tax rate on overseas financing income. The plan would also increase tax incentives for investing in higher risk companies and for research and development by small and medium-sized enterprises. The reform strategy is to allow groups based in the UK to compete more effectively with those based overseas, while protecting against the artificial diversion of UK profits. Thus the CFC rules will include a finance company partial exemption that broadly results in an effective UK tax rate of one quarter of the main rate on profits derived from overseas group financing arrangements. As stated earlier, this will equate to 5.75 per cent. In particular, the revamped rules will allow a company wishing to finance subsidiaries abroad to pay only a quarter of the prevailing corporation tax rate.
In conclusion, the budget was not a walk in the park but a serious effort has been made to try to galvanise growth and attract back UK subsidiaries that looked for greener pastures that provided enjoy low tax shelters. George wants them back to grace his parlour and feed the unemployed. What an altruistic and noble thought!
Mr Mangion is a partner at PKFMALTA, an audit and business advisory firm.
[email protected]