PRUEBAS EN SITIO Y PUESTA EN MARCHA

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

Context

Growth slowed to 2.2 per cent in 2005 and the claimant count was nearly 80,000 higher in December than in March. The PBR noted that “World growth in 2005, while still robust, is judged to have moderated 1010 HC Deb 16 March 2005 c265 1011 Ibid. 1012 EFSR 2005, page 125 1013 EFSR 2005, page 160 1014 EFSR 2005, page 123 1015 HC Deb 16 March 2005 c264

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compared with 2004, due to a combination of high oil and petroleum product prices, structural difficulties adjusting to higher energy prices and other shocks, and cyclical slowdowns following above potential growth in some economies”.1016 The U.K.’s growth forecast was reduced significantly to 1¾ per cent for 2005 and below trend in 2006.1017 On the public finances, the budget deficit was now to be over 3 per cent of GDP in 20051018 and the PBR noted the role of the slowdown in this.1019

Overall PBR Objectives

PBR 2005 was titled “Britain meeting the global challenge: Enterprise, fairness and responsibility” and again focused on longer term challenges, despite the cyclical pressures. The same six long-term goals were reiterated as they had been in the previous Budgets and the Chancellor argued “the task of this pre-Budget report is to meet and master global economic challenges and to make the critical decisions to secure Britain's long-term economic future. The theme of this report is that by combining our enterprise with investments in skills and science, in infrastructure and in housing, at every point matching investment with reform, Britain can lead in the world's most wealth-generating and dynamic sectors... With fiscal discipline, and by matching investment with reform in welfare and in public services, we can combine a strong economy with opportunity and security for all”.1020 The stabilising role of automatic stabilisers was reiterated and these were shown to be responsible for most of the changes in the deficit, with discretionary measures providing some discretionary tightening.1021 The Budget measures were mostly tax increases, with a few discretionary spending remissions for pensioners. Whilst this raised a sizable amount of revenue, there is little overall discussion of a major fiscal tightening although the PBR does note: “In 2005-06 and 2006-07 there is expected to be a modest tightening in the impact of fiscal policy with the effect of the tighter fiscal stance just outweighing the effect of the automatic stabilisers”.1022 I therefore categorise measures which are obviously revenue raisers as endogenous, deficit reduction. I provide an alternative classification of endogenous, deficit reduction for the other exogenous measures.

Major December Tax Changes

The biggest remission was a freeze in the main fuel duties “In response to the continuing volatility in the oil market”.1023 This followed a postponement of the Budget 2005 rise for September 2005 and I include a correction for this in the series. The PBR announcement postponed the decision until Budget 2006. As in previous years I classify this as endogenous, demand management as it is to affect the affordability of fuel.

The V.A.T. threshold was also increased – initially planned for the 1st April 2006 but the actual implementation was on 1st April 2007 due to requiring E.U. approval. I use the latter date. This measure was “to help small businesses with cash flow difficulties and reduce administrative burdens”.1024 This change is not described as offsetting the current slowdown and I classify it as exogenous, long-run.

The major tax rise was on North Sea oil, from 1st January 2006. The PBR argued “In striking the right balance between producers and consumers, the North Sea oil taxation regime needs to promote investment and ensure fairness for taxpayers. In response to the recent significant rises in oil prices which are now expected to be sustained in the coming years, the Government will, with effect from 1 January 2006, increase the rate of supplementary charge to 20 per cent to maintain this balance”.1025 This change is therefore endogenous; I classify it as deficit reduction as it aims to raise revenue.

There were a number of further anti-avoidance measures. The PBR explains “For the tax system to be effective, everyone needs to pay their fair share of taxes and receive the tax credits they are entitled to. Tax avoidance and tax or tax credit fraud undermine the ability of the tax system to deliver its objectives, imposing significant costs on society”.1026

Consequently measures were introduced on: financial avoidance using stock lending arrangements from 5th December 2005, life assurance companies from 29th September 1016 PBR December 2005, paragraph 1.10 1017 PBR December 2005, paragraph 1.11 1018

As measured by public sector net borrowing, ONS series ANNX. 1019 PBR December 2005, paragraph 2.38 1020 HC Deb 5 December 2005 c605 1021 PBR December 2005, table 2.4 1022 PBR December 2005, page 32. 1023 PBR December 2005, page 160 1024 PBR December 2005, page 52 1025 PBR December 2005, page 118 1026 PBR December 2005, page 115

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2005, corporate intangible assets, corporate capital losses, capital gains and tobacco smuggling all from 5th December 2005. Finally, there were increases in rebated oil duty to tackle fraud from 6th December 2005. I classify all these as endogenous, deficit reduction.

Finally, the Government also tackled tax-motivated incorporation from 1st June 2006 as “The zero per cent and minimum rates of Corporation Tax were introduced to encourage small companies to retain and reinvest their profits for growth. However, many self-employed and employed people are being advised to incorporate simply to reduce their tax and NICs liability”. I classify this change as endogenous, deficit reduction.

These changes account for over 90 per cent of the remissions and for the increases in the 2005 PBR.