Wednesday March 12, 04:38 PM
UK BUDGET ROUNDUP Darling delivers balanced budget with few surprises
LONDON (Thomson Financial) - Alistair Darling, the UK Chancellor of the Exchequer, today produced a subdued budget with little sign of the showmanship favoured by his predecessor, Gordon Brown.
In his maiden Budget speech Darling highlighted
the choppy economic waters the UK is currently navigating -- once again lowering his growth forecasts and warning of rising inflation although he insisted the government will meet its economic rules over the current cycle.
The Budget was fairly neutral in fiscal terms, with a surprisingly sharp hike in spirits duty and some other tax measures balancing modest giveaways for pensioners and first-time home buyers, analysts said.
Overall though, the speech was more notable for the conspicuous absence of tax and spending initiatives, leading some commentators to brand it a damp squib.
Also grabbing analysts' attention was a sharp rise in the volume of government debt to be issued the coming fiscal year. The Debt Management Office will issue 80.0 bln stg of gilts in 2008/9, far higher than the market had been expecting. In 2007/8 the figure was 58.5 bln.
The Chancellor lowered the expected rate of GDP growth for 2008 to 1.75-2.25 from the 2.00-2.50 pct he had stated in the pre-budget report in October, which in turn had been revised down from 2.5-3.0 pct previously. For 2009, Darling sees GDP at 2.25-2.75 pct, lower than the 2.5-3.0 pct range previously. For 2010, however, he maintained the GDP growth estimate at 2.50-3.00 pct.
On the inflation front, Darling said he sees prices rising over the short term before settling at the 2 pct target by 2009. In the Budget documents, the Treasury said it expects CPI (NYSE: CPY - news) to be 2.5 pct in 2008.
Fiscal targets were also revised for the worse -- although the Chancellor insisted the government would comply with its fiscal rules.
Darling was forced to revise up public sector borrowing figures for the coming years. For the fiscal year 2008/09 he sees borrowing at 43 bln stg up from 36 bln stg previously. For 2009/10 he sees it at 38 bln stg from 31 bln stg, for 2010/11 at 32 bln stg from 28 bln stg and for 2011/12 at 27 bln stg from 25 bln stg. However, he lowered the borrowing forecast for this year to 36 bln stg, down some 1.4 bln from the previous figure.
Meanwhile, the current budget balance this year remains in line with the forecast of an 8 bln stg deficit, he said.
Net debt will peak at 39.8 pct of GDP in 2010/2011, fractionally missing the 40 pct threshold targeted by the Treasury's second economic rule, Darling said. This figure excludes the impact of Northern Rock (LSE: GB0001452795.L - news) , the stricken UK bank that was put into public ownership in February due to massive funding problems.
Darling said public spending in the coming three years will grow by 2.2 pct and by a rate of 1.9 pct after 2011.
Turning to specific measures, analysts said the Budget was notably lacking in excitement.
'(Darling) was so risk averse, deferring even minor initiatives, that he could be accused of refusing to act,' said Lisa Macpherson, National Director of Tax at accountants PKF.
Even so, there were some new initiatives.
Notably, the Chancellor announced a series of green taxes. The government's climate change levy will rise in line with inflation, revenue from plane duty will increase by 10 pct, fuel tax will rise by 0.5 p per litre from 2010, and legislation for supermarkets to charge for plastic carrier bags will be considered. Furthermore, there will be a major reform to vehicle excise duty, raising taxes on heavy-polluting cars and making cleaner vehicles exempt for a first year.
There were also overtures to homebuyers scared off by high house prices and restrictive mortgages. The government will spend 8 bln stg on affordable homes over the next three years, review housing finance to increase the availability of fixed-rate mortgages with terms of up to 25 years, and make key worker like nurses exempt from stamp duty if they share ownership of their home and own less than 80 pct of the equity.
Chris Samson, head of secured lending at Deloitte, said 'a substantial industry effort' would be required to persuade the public to consider longer fixed-term mortgage products. 'Recent research by YouGov (LSE: YOU.L - news) for Deloitte, indicated that only 10 in ten borrowers would consider fixing their mortgage rate for between 10 and 25 years,' he said.
As is customary, the Chancellor raised alcohol duty, with the standout figure a 55p tax increase on bottles of spirits. Taxes on alcohol in general will rise 6 pct above inflation from Sunday, and will increase by 2 pct above the rate of inflation in each of the next four years.
Tax on cigarettes also rose. From 6.00 pm today the additional duty on tobacco will add 11 pence to the price of a packet of 20 cigarettes and 4 pence to the price of five cigars.
Howard Archer, economist at Global Insight, said the rise in alcohol taxes was 'marked', and were one of the Budget's only major changes.
There was little to placate businesses, who have given Darling a rough ride since he announced controversial plans last year to reform capital gains and non-domicile tax. The Chancellor confirmed a blanket levy on non-doms of 30,000 stg after 7 years in the UK, but said there will be no further changes in this parliament or next.
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