DISEÑO DE TABLERO DE CONTROL

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

Context

The U.K. had weathered the global downturn, being the only G7 economy not to have experienced at least one quarterly contraction in the previous three years.977 Growth picked up in 2003 at 2.9 per cent; inflation remained low — the 12-month rate to March 2004 was 1.1 per cent (CPI) - and unemployment had fallen by another 60,000. The Chancellor reported to the House of Commons that this was now the longest sustained period of economic growth for more than 200 years.978 The outlook was also good. Global demand was strengthening and the Treasury forecast growth between 3 and 3½ per cent in 2004 and 2005.979

Overall Budget Objectives

The usual comments were once again made about allowing the automatic stabilisers to work.980 The Budget claimed that the fiscal rules were on track to be met over the cycle. There was to be no discretionary fiscal stimulus – indeed the effect of the Budget measures was largely neutral.981 The estimated deficit was slightly higher than forecast, but there was to be no balancing of the budget. The Chancellor argued “Rigidly balancing the budget year on year means that fiscal policy could not support monetary policy over the cycle and, even in low debt countries, the debt to GDP ratio would fall year on year even when it is obvious that more investment is important to the long-term strength of the economy”.982 Discretionary policy was again focused on the long-term: “Within this disciplined framework, Budget 2004 shows the Government can meet its public spending commitments and announces further decisions to create a Britain of stability and strength”.983 The goals were familiar: raising productivity growth by promoting enterprise, flexibility, science, innovation and skills; providing employment opportunity for all by promoting a flexible labour market; fairness, tackling child and pensioner poverty; world class public services; and the environment.984

976 PBR 2003, paragraph 5.88 977 EFSR 2004, paragraph 2.1 978

HC Deb 17 March 2004 vol 419 c301 979 EFSR 2004, paragraph 1.11 980 EFSR 2004, paragraph 2.8 981 EFSR 2004, table 2.7 982

HC Deb 17 March 2004 vol 419 c324 983

EFSR 2004, paragraph 2.47 984

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While the discretionary changes were largely neutral985 overall, tax increases offset spending commitments. Again the Budget was a mix of exogenous tax changes and those to finance extra expenditure.

Major Budget Tax Measures

I first deal with the tax cuts. On the consumption tax side there was a decision to postpone revalorisation of fuel duties until 1st September 2004. Revalorisation was the default each year and so this represented a temporary tax cut; the new policy action was postponement. A differential was also introduced between sulphur-free and other main road fuels, so in part this action was environmental. However, the postponement is not explicitly discussed. In July 2004 the implementation was postponed until the PBR and the December 2004 PBR, while discussing fiscal projections, notes that this took account of “a continuation of the freeze on the main road fuel duties, in response to the sustained volatility in the oil market”.986 I therefore classify this deferment in the same way as the one in 2003, endogenous, demand management.

Turning to other duties, there was a freeze on Vehicle Excise Duty. The environmental merits of the Government’s reform of V.E.D. are discussed, but then it is simply announced that V.E.D. rates are to be frozen.987 As in previous years, I assume it was a politically motivated remission and without any obvious correlation with current conditions I classify this as exogenous, ideological.

Spirits Duty was also frozen until the end of the Parliament. There was to be a new alcohol fraud strategy and the introduction of tax stamps from 2006-07. However, “in order to minimise and offset the compliance costs to the legitimate trade”, the duty on spirits was frozen “helping to absorb the costs associated with tax stamps”.988 I therefore classify this as exogenous, long-run, being to support the industry.

Another measure to help business was the recycling of Landfill Tax revenues. This followed the Budget 2003 announcement that “increases in the standard rate of landfill tax would be introduced in a way that is revenue neutral to business as a whole and to local government. Since the 2003 Pre-Budget Report, the Government has published research on the recycling options and has consulted stakeholders on these”.989 The FSBR includes the cost of this tax remission beginning in 2006-07; I therefore assign the implementation date as 6th April 2006. As part of the Landfill Tax package I classify it, together with previous justifications for the tax, as exogenous, ideological.

Finally, improvements were to be made to Venture Capital Trusts, including a temporary increase in the level of income tax relief for two years as “Venture capital is the seed bed of future enterprise”,990 along with the measures to stimulate productivity growth. I classify this as exogenous, long-run.

The major revenue raiser was, again, a package of anti-avoidance and loophole-closing measures. In the introduction the EFSR argued that these would promote “fairness in the tax system by ensuring that everyone contributes to the extra investment in public services”991 and later argued “A tax system in which everyone pays or claims what is due forms the basis for the Government’s objectives of stable public finances and world-class public services. Tax avoidance and evasion undermine these objectives”.992 Included in this ‘package’ were changes to finance leasing and life companies from 17th March 2004 and the payment of V.A.T. on commercial buildings from 18th March 2004. There was also an increase in rebated oils duty from 1st September 2004 “which will, when combined with the ongoing impact of other strategy measures, further reduce the potential for oils fraud and reinforce the approach to tackling it".993 Furthermore, a minimum rate for distributed profits was introduced from 1st April 2004 “to address a trend to tax-induced incorporation by the self-employed, and to ensure low rates of corporation tax are focused on those businesses adopting the corporate legal form in order to invest in, and grow their business”.994 Based on the above statements, I classify this group of changes as endogenous, spending-driven.

985 EFSR 2004, table 2.7 986 PBR December 2004, page 26 987 EFSR 2004, page165 988 EFSR 2004, page 122 989 EFSR 2004, page 168 990

HC Deb 17 March 2004 vol 419 c327 991 EFSR 2004, page 1 992 EFSR 2004, page 118 993 EFSR 2004, page 122 994 EFSR 2004, page 58

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The Landfill Tax escalator was again confirmed from 1st April 2004. There appears no reason to deviate from the original classification of exogenous, ideological as it “encourages efforts to minimise the amount of waste generated and to develop more sustainable waste management techniques”.995