UK Government Borrowing Set To Double

by Jason Gorringe, Tax-News.com, London

28 November 2002

UK Chancellor of the Exchequer (Finance Minister) Gordon Brown on Wednesday presented the Treasury's 'Pre-Budget' statement, forecasting a lower rate of growth and higher government borrowing than had been predicted.

Borrowing is now expected to be GBP20bn this year, compared with the Budget forecast of GBP11bn, and will be GBP24bn instead of GBP13bn next year, said the suddenly unstealthy Mr Brown. The government is now forecasting 1.6% growth this year instead of 2-2.5%, and 2.5-3% next year instead of 3-3.5%.

The Chancellor said however that he would still be able to meet his famous "golden rule" which says that over the economic cycle the government should borrow only to fund investment. He predicts a budget deficit of GBP6bn this year and GBP5bn next year; but expects a return to surplus after that.

Mr Brown made no significant changes to existing plans for spending or taxation, saying that the National Insurance (social security tax) increases announced in the last budget would bring in GBP41bn. The 12.5% royalty tax on the North Sea’s 30 oldest oil and gas fields will be abolished, as expected, and bingo duty will also be abolished. But the landfill tax will be raised from GBP13 to GBP16 per tonne from 2005.

The Chancellor reiterated his intention of reviewing the UK's rules on non-domicile tax status - the tax system which means foreigners resident in the UK but without a link by birth or other close UK connection ('domicile') are taxed on their UK based income and gains, but can invest money offshore and accrue interest and capital gains free of tax.

The Society of Trust and Estate Practitioners (STEP, www.step.org) commented that this review may harm the UK economy and be a gift to Britain's EU competitors. John Riches, Chair of the STEP's UK Technical Committee said: "No one can guarantee that wealthy individuals will leave the UK if the rules are altered radically, but we do know that globalisation has made it easier to move money and labour across national boundaries and that our EU competitors, like Belgium and Italy, have similar schemes specifically aimed at attracting the wealthy."

In Italy, there have recently been major changes to gift tax which make it attractive for wealthy foreigners to base themselves there whilst in Belgium, most capital gains can be realised free of tax.. Non-domicile tax status is not a "loophole", says STEP, but rather a conscious policy decision which is so successful in attracting wealthy individuals from other countries that our competitors are now doing exactly the same thing.

Before the Chancellor made his Pre-Budget speech, London-based economic think-tank The Adam Smith Institute (www.adamsmith.org) issued a critique of his tax policy by Gabriel Stein, senior international economist at Lombard Street Research, showing that the UK has increased taxes in the last five years more than the fourteen other members of the EU and more than every other member of the G8 except Japan. The ASI says that the UK's relative economic success in the 1990s was due to previous tax-cutting reforms and that Mr Brown's return to his party's 'tax and spend' roots risks throwing it all away:

Says the report: 'Britain went through a long period of being ‘the sick man of Europe'. Since 1979, the country showed the world the way in cutting taxes. It has also, and not accidentally, generally grown faster than many of its main competitors. Mr. Brown seems set to throw all of this away in his zeal to raise taxes. The successful model has been that reduced taxes provide more incentives and boost economic growth, and with it job-creation and personal wealth. The UK has clawed its way back up the league table by following such policies. It has out-grown most of its rivals, secured fourth place in the world table of major economies, and shown that markets, not governments, bring prosperity.

'Mr Brown inherited a golden economic position. Unfortunately, like many children who come into inherited wealth too easily, he has begun to squander it.'

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