Expert Blog

Pre-budget review

This week’s Budget is a peculiar beast. Normally, a year passes between each of these fiscal statements. But this one is happening only a few months after the last. What can really have changed in the meantime? What new policies can the Chancellor offer now?

The answer to the first of those questions is straightforward: the composition of the Government has changed, even if the Chancellor has not. This Wednesday will mark two months since the Conservatives won a majority and could govern without support from the Liberal Democrats. That’s probably why this Budget is happening in the first place. It is George Osborne’s way of saying: the Tories are in charge now. The Budget book may have red covers, but its contents will be blue. 

As for what those contents will be, Osborne is still constrained by the cause of deficit reduction, but also by his past promises. With or without the Lib Dems, the Chancellor has already announced numerous policies for this Parliament: lower taxes for low-income earners and for businesses; a £15 billion scheme to renovate Britain’s roads; a similar quantity of cuts to the welfare budget; a plan to invigorate the north of England. These are givens. No doubt we shall hear more about them when Osborne stands up to the despatch box.

But there will also be policies that aren’t givens, over which question marks remain. One of these, as we wrote recently, is fuel duty. Throughout the last Parliament, Osborne did a lot to either stall or reverse the upwards momentum of this levy. But now there’s speculation that he might start increasing it. If you don’t mind us quoting ourselves:

“According to the newspapers, George Osborne has a plan to sneakily increase fuel duty in his forthcoming Budget – and raise an extra £4 billion a year for the Exchequer. He’d do so by hiking fuel duty in line with inflation. This is known as a ‘real-terms freeze,’ because the increase in duty would be frozen at the same level as the increase in other prices. Everything’s going up at the same rate.

But very few motorists would regard it as a freeze. After all, fuel duty may only go up with other prices, but it would still go up – from 58p a litre now to 65p by the time of the next election, if inflation continues as expected. This is very different from the freezes that Osborne delivered during the last Parliament. Back then, he generally kept the level of fuel duty the same, regardless of inflation. That was actually a real-terms cut.”

And he might raise taxes on diesel too, as we’ve also explained on this blog:

“After the Supreme Court’s judgement, it will be worth keeping an eye on whether [Osborne] acts against diesel in his forthcoming Budget. Some observers predict either incentives for scrapping diesel vehicles, or taxes for using them. Or both.

In any case, it’s likely to be a contentious matter. The Sun newspaper is among those pointing out that past Chancellors actually encouraged people to buy diesel – so it’s rather harsh to penalise those same people now. Can they not be compensated in some way? This current Chancellor, who has gone out of his way to court motorists, will surely be listening.”

This speculation will concern company car drivers, just as it will concern all drivers – but company car drivers also have other policies to fear. The former Liberal Democrat pensions minister Steve Webb has recently suggestedthat Osborne might target the “salary sacrifice” schemes by which employees can sacrifice part of their salary in return for something, such as a car, from their employers. This leaves both employee and employer paying less in National Insurance contributions to the Exchequer, but now the Exchequer might want some of that money back. The schemes could eventually be scrapped, according to Webb, or at least cut back.

If Osborne does go ahead with these policies, it will mark a change in his general disposition towards motorists. From being a giving Chancellor, on the whole, he will become one who takes too. And it’s quite a gamble. Will drivers remember all that the Chancellor did to control fuel duty in the last Parliament? Or will they just be angry that it’s going up now? Will they recognise that he’s investing £billions in the country’s road network? Or will they spend more time baulking at punitive diesel taxes?

The truth is: we don’t yet know if these are the right questions, let alone what the answers to them are. Things will be clearer after Wednesday.            

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