CONSIDERACIONES PARA LA SIMULACIÓN

Chancellor: Gordon Brown; Prime Minister: Tony Blair (Labour)

Context

Growth in 2006 was stronger at 2.9 per cent and the PBR notes the improvement since March.1040 Unemployment was also now falling again. However, the consumer price index had edged up to 3 per cent in December, the higher point of the target band. Public sector net borrowing had turned out higher than forecast – partly due to higher than expected inflation1041 and the expected borrowing outturn for 2006-7 was 2.8 per cent of GDP.1042 Overall PBR Objectives 1033 EFSR 2006, page 119 1034 EFSR 2006, page 164 1035 EFSR 2006, page 116 1036 EFSR 2006, page 119 1037 EFSR 2006, page 120 1038 EFSR 2006, page 70 1039 FSBR 2006, page 198 1040 PBR December 2006, paragraph 2.22 1041 PBR December 2006, table 2.4 1042 PBR December 2006, paragraph 2.43

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From the outset the PBR 2006 emphasises the long-term global challenges and opportunities facing Britain: rapid changes in technology, globalisation, terrorism, world poverty and the environment. The theme in 2006 was ‘investing in Britain’s potential’ – the PBR’s title. Competing in the new age of globalisation and the need to invest in education and knowledge were placed centre stage. As in March, education was emphasised and the Chancellor concluded “Stability is our foundation, education our No. 1 priority — education first now and into the future”.1043 In planning for the long-term challenges, the Chancellor rejected balancing the budget: “One choice for Britain would be to adopt a balanced budget policy, but to achieve that by cutting back on essential investment in schools and infrastructure would in my view weaken us for the global challenges ahead”.1044 Rather, “The 2006 Pre-Budget Report projections for the public finances show that the Government is meeting its strict fiscal rules”,1045 in other words, no balanced budget today but still balance over the cycle. The role of automatic stabilisers was unchanged. The highlighted discretionary policy changes were: an increase in Air Passenger Duty, further expenditure on schools and action to modernise the tax system, protect revenue and tackle avoidance.1046 Most of these were tax increases and overwhelmingly offset the remissions, including the extra spending for schools. It seems need for fiscal fortification was, to some extent, recognised and the PBR shows that the discretionary measures did tighten policy – introducing some discord between the Chancellor’s statements and the PBR detail. I continue to classify the anti- avoidance measures as endogenous, spending-driven. I will take the other changes at face value but will provide an alternative classification of endogenous, deficit driven for the other exogenous changes.

Major PBR Tax Measures (and other changes before Budget 2007)

I first deal with the revenue raisers. In the section on protecting tax revenues the PBR argues “A fair and modern tax system encourages work and saving, responds to business developments and globalisation and supports the provision of world-class public services… tax avoidance and tax fraud undermine the ability of the system to deliver its objectives, imposing significant costs on the rest of society”.1047 I continue with the classification of these measures as endogenous, spending-driven, though given the circumstances there is a case to be made that these are endogenous, deficit reduction – either way they are endogenous. The major changes were, firstly, changes for Managed Service Companies from 6th April 2007 and 6th August 2007, responding “to evidence of significant growth in Managed Service Company (MSC) schemes which are used to avoid paying employed levels of tax and NICs”.1048 Without a way to split the yield, I assign it to the first date. Secondly, there were changes to the Controlled Foreign Companies rules following the European Court of Justice (ECJ) judgment in the Cadbury Schweppes case and to remove the public quotation exemption to prevent specific avoidance.1049 Thirdly, there were measures “to prevent avoidance of [Corporation] Tax using schemes involving financial products”1050, implemented on 6th December 2006, 6th and 7th March 2007. I use the 2006-07 revenue figure for the first date and the difference between this and the most recent year as the effect for the latter measures, assigning them to the 6th March 2007.

There were two further major revenue raisers. Firstly, Air Passenger Duty rates were to rise from 1st February 2007 as part of the “next stage in the Government’s strategy for tackling climate change both domestically and globally”.1051 I take this at face value and classify it as exogenous, ideological. Secondly an attempt was made “to simplify the tax treatment of general insurance reserves”1052 from 19th July 2007. I take this at face value and classify it as exogenous, long-run.

There were five major remissions. First, transition arrangements for film tax reliefs were introduced “To ensure continuity in film tax relief during the transition to the new system”1053, which I classify as exogenous, ideological. Second, deduction rates for the new Construction Industry Scheme, which began on 6th April 2007, were set. The new scheme was to “reduce regulatory burdens and help the construction

1043 HC Deb 6December 2006 c314 1044 HC Deb 6December 2006 c313 1045 PBR December 2006, page 13 1046 PBR December 2006, paragraph 2.51 1047

PBR December 2006, pages 121 and 125 1048 PBR December 2006, page 122 1049 FSBR 2007, page 224 1050 FSBR 2007, page 225 1051 PBR December 2006, page 155 1052 PBR December 2006, page 124 1053 PBR December 2006, page 123

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industry comply with its tax obligations”.1054 I classify this as exogenous, long-run. Third, there was an extension to the existing sunset clause of the Landlords’ Energy Saving Allowance from 6th April 2009 to 2015 as part of the “next stage in the Government’s strategy for tackling climate change both domestically and globally”.1055 I classify this as exogenous, ideological. Fourthly, the travellers’ allowance from outside the EU was raised from 1st December 2008 following a “recent decision by EU Member States”.1056 I classify this as exogenous, external. Finally, there were reforms to life assurance companies’ taxation from 1st January 2007 “to amalgamate five business categories into one, simplify the rules applying on a transfer of insurance business and modernise the Crown option”.1057 I classify this as exogenous, long-run.

These changes account for 95 per cent of the increases and 100 per cent of the remissions.