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Knocked off course
Tax increases to fill the remaining hole

The first Pre-Budget Report from Alistair Darling raised taxes by a total of £1.5bn according to The Institute of Fiscal Studies (IFS). The IFS's director, Robert Chote, said: "Recent financial market problems and a weaker outlook for wages have knocked a £6.5bn hole in the Chancellor's current budget balance next year, but he believes that this will shrink to £1.5bn after three years. By then he expects to fill the remaining hole with the tax increases and other measures that he announced in the Pre-Budget Report."

These include increases in capital gains tax and aviation taxes, further "anti-avoidance" measures and a decision to bring forward the end of the earnings-related component of state pensions, all of which together will raise around twice the money he will be giving away through his £1.4bn cut in inheritance tax.

The IFS also warned that while Mr Darling promised to spend £2bn more on investment in public services over the coming years, this money would be borrowed, rather than raised through tax rises or cuts in spending elsewhere.
In the PBR, the Chancellor doubled the amount a married couple can leave to their children tax-free to £600,000 - a measure costing £1.4bn a year by 2010/11.

However, this cost is only around half what the Treasury will raise from tax increases on air travel, capital gains, the closure of loopholes and changes to the way pensions are treated.

The IFS also commented that Mr Darling's £2bn of extra borrowing meant he was likely to break one of the key borrowing rules laid down by Gordon Brown - that the national debt should not exceed 40 per cent of Britain's gross domestic product.

Mr Darling said: "The reason that I downgraded my expectation of growth next year was, quite simply, because of the problems that I saw coming out of America this summer which are now affecting economies right across the world. I am optimistic that because of the strength of the British economy we can get through these difficulties, just as we got through difficulties in the past and we will be able to continue to see growth in the economy."

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Levels and bases of, and reliefs from, taxation are subject to change.

This article is for your general information and use only and is not intended to address your particular requirements. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. Any references made to the Pre-Budget Report may be subject to the Finance Bill becoming law.

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