The 2009 Budget

Today is budget Day. I am very wary of commenting so soon after the Chancellor has packed up his briefcase and returned to the refuge of Number 11, but there is more than enough in today’s speech to warrant a brief tirade. These days we have to wait for quite some time to get the really bad news (or detail, as it is often called) so there will no doubt be more comments to come.

The background to this Budget is an irresponsible Government that presided over an extended period of growth but failed to set aside the tax revenues generated for the bad times. Instead, it poured money into public services, achieving very little noticeable improvement in the process. At the same time it failed to put the brakes on private household consumption and allowed the savings ratio to fall to zero (or worse, depending on how your define the ratio) and relaxed monetary policy to enable households to borrow far too much, too cheaply, once their existing income/savings had run out.

With the stunning and rapid collapse in the global economy, the Government has seen its tax revenues begin to fall and has had to borrow huge amounts of money to save financial institutions and prevent the economy from collapsing. The Chancellor estimates today that the UK economy will shrink by 3.5 percent this year and that the Government will have to borrow £175bn this year, which is an eye watering 12.4 per cent of GDP. Over the following four years borrowing will be 12 per cent, 9 per cent, 7 per cent and 5.5 per cent of GDP. The Government Debt Office has just announced it will auction Gilts worth £200bn this year - a sure sign of an impending rise in interest rates.

The Government has pumped huge amounts of money into the system to support it, even writing cheques on itself to do so and has brought interest rates down to zero (yes, I know its the Bank of England, strictly), all of which means that responsible households with savings have suffered, and irresponsible lenders and borrowers have been supported. As one commentator on the BBC put it this morning, the Government’s solution to the problem has been the equivalent to giving a heroin addict a double dose of heroin.

So, the Budget and at first sight these are the key points:

 £600 million to kick start the housing market, including guarantees and an extension of stamp duty relief
 £2.6bn new unemployment funding
 New 50 per cent income tax rate for earnings in excess of £150,000 (from 2010)
 Restricted tax relief on pension contributions for those with incomes over £150,000 from 2010
 ISA limits increased to £10,500, but phased in by date and age (how can a Government make such a mess of such a potentially simple tax privileged savings plan?)
 Top-up to the trade credit insurance scheme to help businesses, plus a relaxation of loss relief
 A tougher stance on offshore accounts, but with a penalty free “confession period” prior to the commencement of the new regime; additional tax avoidance measures
 Measures to tighten financial regulation and make financial advice and education more accessible (shutting the stable door after the horse has bolted)

The Government can go on blaming the “global economy” and bankers, and conducting a high profile recovery of bankers bonuses and pensions in an attempt to deflect attention from its own failings, but ultimately it will not be able to escape from the fact that it must bear a substantial proportion of the blame for the mess that is reflected in this Budget - probably at the next election.

For many households the next few years will be very difficult and everyone from high earners with good savings to low earners with high debts will be faced with tough decisions.

This post is an initial reaction to the Budget, written shortly after the end of the speech. Please do not take action on what you read here. It is only in the next few days that the full measures and details will become clear, as much of the “Budget” is now a series of press releases and orders released concurrently that take time to digest. Please speak to your professional adviser (or us) if you are contemplating action of any kind in response to this budget.