Published at 13:11, Wednesday, 09 May 2012

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THE headlines have now subsided and March’s budget has mostly been replaced by other hot political stories on the front pages.

The dispute over VAT on hot takeaway food escaped much notice until some time following Chancellor of the Exchequer George Osborne’s annual budget – demonstrating that the impact of particular provisions is not always obvious to all on day one.

Be that as it may, the tax and other changes which were announced will take place and make their impact felt on us during the coming months. The question is, to what extent will the measures announced have a real financial and economic effect?

The financial effect will certainly make a difference for most individuals and many businesses, but one has to query whether or not the general economic consequences will be notable. It was, after all, a fiscally neutral budget, with tax cuts and spending increases being approximately matched with tax increases and spending cuts.

Plenty of winners and losers but more of a “score draw” for the economy overall and, indeed, for many individuals and businesses once the whole package is taken into account.

It was an interesting budget from a practitioner’s point of view, with the announcement of genuinely radical elements like the General Anti-Avoidance rule which could even be successful in its aim of putting a stop to much of the artificial scheme creation that was its target. Certainly it is the most significant attempt yet in this area. That may well have long-term implications for government revenues. More immediately, there were an unusually large number of changes which affected the man or business in the street. For business, the cut in mainstream Corporation Tax was certainly the highlight. Nevertheless, we must remember that many companies in Cumbria already pay tax only at the lower smaller companies’ rate and will, therefore, receive no benefit at all from this change.

The biggest cut was from the Income Tax cuts aimed at lower and middle earners which are also likely to translate fairly directly into higher spending. This can only help the economy in these difficult times whereas some, at least, of the higher tax charges may not reduce discretionary spending in the same way – I am thinking here of the stamp duty increases (offset possibly by the cut in the 50p rate) rather than the so-called “granny tax”.

Even taking that into account, however, I cannot but think that the whole exercise will have a relatively small effect when compared to other factors. The chancellor has left the inflation target for the Bank of England at two per cent, but it does seem that he is probably more concerned about undershooting rather than too much inflation as long as it does not get out of hand. We can expect more quantitative easing in the year ahead and we know that petrol duty is to go up again. Both will have an effect on prices but clearly there is more concern about possible deflation and a return to recession.

Bank lending to business and demand, both domestically and internationally, are likely to be much more important than the budget in the long run. If it is remembered in years to come, it will probably be for the massive leaks beforehand rather than for any economic lift it caused.

Published by http://www.in-cumbria.com