Preview: The Pre-Budget Report

No one knows what’s in the Pre-Budget Report yet, but for a clue look to the most recent PMQs.

By Ian Dunt

Westminster is feverishly speculating about the Pre-Budget Report (PBR), set to be published on Wednesday. Politically, it’s a hard one to call. Will Labour publish a political PBR, with a view to securing its core vote? Or will it try to tackle Conservative attacks on its financial “irresponsibility” head-on? Most people are betting on the former.

Firstly, a question of timing. Once the PBR was announced for December 9th, political journalists quickly concluded one thing: the general election won’t be held until May. Legally, the Budget has to be published three months after the PBR, and it’s unthinkable that a governing party would run for re-election without a Budget. Or so we thought. Terribly slowly, some lone voices in the Westminster village have started to suggest Labour might just be crazy enough to get into a campaign without a Budget. It would be unprecedented, of course, but these are unprecedented times. That remains an unlikely option, however.

Now let’s get forecasts out the way. The chancellor will have to revise down his previous assessment of what would happen this year. Next year will probably stay unchanged. The Bank of England (BoE) has given Alistair Darling considerable room to revise upwards for 2011 by forecasting GDP growth that year of up to four per cent, which is pretty phenomenal. If he grasps that opportunity with both hands he’ll need to be prepared with a good argument for his optimism though. Projections for borrowing and debt over the next six years will probably remain unchanged – for now.

Right, now let’s get down to the gritty politics of it. Labour has two options. Number one: tax higher earners and continue spending, using the argument that the recovery has to be nurtured and that it’s not time to cut yet. Politically, this saves the party from having to announce any specific cuts just before a general election and secures its core vote – something political parties traditionally aim for after a long period in power. Number two: reveal spending cuts and more substantive, universal tax rises. This neuters the Tory attack that the government is behaving like an irresponsible opposition by pursuing electorally attractive spending while sitting in Downing Street with a giant deficit to deal with.

For a hint of where Gordon Brown and his chancellor might go, look at the most recent PMQs, in which Brown attacked the Conservatives’ inheritance tax cut proposals and used David Cameron’s Etonian background against him. This suggests Labour is set to concentrate on its core vote, which will be attracted to tax rises on the rich and continued spending.

Such a move could see income tax rise on higher incomes, although the chancellor is unlikely to go beyond current plans to slap a 50 per cent tax on incomes over £150,000, which will start operating from April of next year. He could, however, launch a direct attack on the Tories by hiking up inheritance tax. When George Osborne first announced the Tories’ inheritance tax cuts policy, to great fanfare, in 2007, Labour responded with its own policy, to increase the nil-rate band from £325,000 to £350,000 from April 2010. This could be cancelled or, alternatively, the chancellor could pledge that there will be no further increase for the next five years or so. This fits with Brown’s love for political ‘dividing lines’.

Alternatively he could opt for further taxes on capital gains. There is an argument that Darling could close the gap between the 18 per cent capital gains tax rate and the new 50 per cent top rate of income tax.

There are clear signs of a desire to strip back middle-class benefits. The government already plans to scale back pensions tax relief for incomes over £150,000 from April 2011. This could be brought forward. But the news that Brown has U-turned on plans to scrap non-means tested tax relief on childcare following a small but significant backbench rebellion indicates he is loathe to upset the middle classes too much ahead of a general election campaign.

If the chancellor plans to really start filling the Treasury with income, there are several options he could take which might not turn the British electorate against him altogether. But everything comes at a price.

Gift aid could be undone by restricting tax relief to the basic rate, although charities, it goes without saying, would cause an almighty stink. National insurance is set to rise by 0.5 per cent next year already, but this could be increased to one per cent. This is the kind of thing a new government would do, but if Labour wanted to tackle the Tory charge head on and prove how committed it is to halving the deficit, it could well go down this route. It would be a tax on jobs, of course, but Britain’s social security rates are still pretty low compared to much of Europe, so minister would have pre-prepared arguments to hand.

Darling is caught between a rock and hard place. He’ll probably go for the rock, but speculation is everything at this stage, and no one really knows for sure.