1/5/09A budget to help people through the global recession...

The Chancellor was always going to face a tough challenge putting together a coherent budget in the current economic climate.

He has had to make some optimistic assumptions about the rate of recovery in order to generate the level of income the government needs. In any event, it looks like we will soon have the biggest borrowing figures in the country’s history.

The recession is forecast by the Treasury to start easing by the end of this year, with a total fall in Gross Domestic Product (GDP) of 3.5%, and economic growth to return during 2010 at an estimated 1.25% GDP growth. Thereafter, it expects growth of 3.5% a year, working towards the long term ‘trend’ of 2.75%.

If these figures are not achieved, the government’s borrowing plans will prove inadequate to cover its expenditure, even taking into account this year’s minimal (0.7%) growth forecast for government spending.

Investments

While initial market reaction to an estimated £220 billion in borrowing was adverse, the long term impact will be more difficult to determine.

One positive is that, after years of lobbying, the Individual Savings Account (ISA) limit has finally been increased from £7,200 (including last year’s modest rise) to £10,200 - half of which can be in cash. Unfortunately, only those over 50 benefit in the current tax year, but younger people can benefit from April 2010. 

The change may not sound much, but in percentage terms it is more than 40% extra. A couple nearing retirement can now aim to salt away over £20,000 a year into this ‘tax exempt’ regime.

Unfortunately, the Chancellor failed to reinstate the tax reclaim for tax deduction at source in respect of dividends from UK companies. Doing this for ISAs and pensions would have been a massive benefit to millions of savers.

Tax and benefits

Minor tweaking of tax on alcohol, tobacco and petrol/diesel was to be expected. It was also unsurprising that the winter fuel allowance has been continued for another year. Improvements to child benefits will help may families and the state pension will rise by 2.5% next year, even if the RPI  is at (or below) zero in September. Pensioners on Pension Credit will also see an easing in the amount of capital that can be disregarded in calculating entitlement, from £6,000 to £10,000.

Potentially worse off will be those earning above £150,000 a year who will, from April 2101, see their top rate of income tax rise to 50%, while personal allowances will disappear for those earning more than £100,000 a year.

Those earning more than £150,000 a year will also have their tax relief on pension contributions reduced, down to 20% at £180,000 a year from 2011. Rules are now in place to prevent many higher earners making additional contributions in advance of the change (please ask for details).

Let’s hope this all works for the British economy.