Baker Tilly expects to see promises of significant increases in public spending in Monday’s PBR

3:46pm Thursday 20th November 2008

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Chancellor Alistair Darling’s Pre-Budget Report on Monday afternoon has to be one of the most important since PBRs were introduced over a decade ago. Yet, according to a market survey by the Hereford office of leading mid-tier accountancy firm Baker Tilly, businesses have low expectations for the Chancellor’s statement.

Almost half (48%) of the 622 business respondents expect that, like last year, the government will be forced into at least one public climb-down following this PBR. This suggests that people have long memories regarding changes to the taxation of non-domiciled residents and the reform of capital gains tax.

Only 22% expect the Chancellor to announce a measure that will adequately address the issue of large companies relocating from the UK to countries with lower tax regimes, while a majority (63%) expect this to be a tax-raising PBR overall.

Baker Tilly’s Hereford-based tax partner Claire Willetts said: “In recent years we have seen, most painfully for the Government in the 10p tax band debacle, tax cuts paid for by tax increases elsewhere. It appears that our survey respondents expect this PBR to be no different.

“Fortunately for the government, the Chancellor can benefit from these low expectations. If the PBR successfully puts cash back into the economy and, critically, does not contain some painful catch in the detail, then low expectations can be exceeded.”

Baker Tilly expects to see promises of significant increases in public spending in Monday’s PBR, against a background of growing global consensus that economies which do not stimulate expenditure risk a longer and deeper recession.

Claire Willetts said: “Monies spent on major public projects, however, can take a long time to find their way into the economy. Immediate fiscal measures can therefore be expected.

“The most dramatic impact can be achieved, and the greatest benefit felt, by a varied package of widespread, modest proposals. In particular, selectively increasing tax credits could provide rapid relief for those in our society who may need it most, while providing that relief in a form which would readily find its way back into the broader retail community.

“Of course, no single measure will achieve perfect coverage. It is well known that tax credits do not benefit all low-income groups. We may therefore expect to see a range of proposals, perhaps also including reductions in the standard rate of VAT, to ensure that the widest possible benefit is achieved from the resources available.”

Claire continued: “Many may observe that such a spendthrift policy seems to fly in the face of the prudence advocated by Gordon Brown when he was Chancellor of the Exchequer. What is the possible justification for this expenditure of public funds? How will they be made good? Others would argue that is to miss the point.

“In such extreme times, failure to take positive steps to stimulate the economy now will only serve to prolong and deepen the recession into which we appear to be plunging.”