Mar 18, 2015 5:42 AM

Giveaways expected in last UK budget before election

The Associated Press

LONDON (AP) The British budget to be unveiled Wednesday will be driven by three certainties: death, taxes and the desire of incumbent governments to win re-election.

Treasury chief George Osborne will, as tradition dictates, carry a battered red briefcase containing his budget into the House of Commons before outlining his tax and spending plans a piece of annual theater more closely watched than usual because it comes seven weeks before a general election. Given the timing, politically motivated giveaways are widely predicted, even as the government forecasts years of austerity to rein in the budget deficit.

Record-low interest rates and inflation at 0.3 percent will reduce the government's borrowing costs by 20 billion pounds ($30 billion) over the next five years, providing room for pre-election largesse, economists suggest.

Osborne is expected to announce that the amount Britons are allowed to earn before they start paying income tax will rise by 10 percent to 11,000 pounds equal to a 200-pound tax cut for 27 million people. A review of the taxes business owners pay on their properties will be formally announced together with measures to boost economic growth in northern part of the country, which has lagged behind the booming southeast.

But the most widely discussed measure may not even be part of the Osborne's drama-tinged budget.

The Guardian newspaper reported Monday that Osborne has drawn up plans to let parents leave homes worth up to 1 million pounds to their children without paying inheritance taxes. That would eliminate inheritance taxes for 27,000 families each year and reduce levies for those with 2 million pound estates by up to 140,000 pounds.

The measure is meant to help Prime Minister David Cameron's Conservative Party win back wealthier voters who are defecting to the U.K. Independence Party and its pledge to abolish inheritance taxes.

The tax break isn't guaranteed to be part of the budget outlined Wednesday because the Liberal Democrats, Cameron's coalition partners, are opposed. But leaking the plans before the budget sends a signal that Cameron intends it to become part of the election debate.

"This is an old chestnut that's wheeled out before every election," Business Secretary Vince Cable, a Liberal Democrat, told the BBC. "It's very cynical. Given what we've just said about the pressures on the budget, if taxes can be cut and it's very difficult within the present budget constraint we've got to start at the bottom with people on low pay, not at the top."

In the six years through next April the coalition government will have cut departmental spending by 9.5 percent in real terms as it struggled to rein in a budget deficit swelled by the country's worst recession since the 1930s and the near collapse of the banking system, according to the independent Institute for Fiscal Studies.

The government credits these policies with helping Britain become one of the fastest growing developed economies. It expanded 3.2 percent in 2014, compared with Germany's 1.3 percent and the United States' 2.15 percent, according to IMF figures.

But the Labour Party says the cuts have been borne disproportionately by poor and working class people and are damaging the long-term health of the country.

Auditor General Amyas Morse stepped into the debate Tuesday, warning that Cameron's government had made deep cuts without sufficiently examining potential risks. The National Audit Office chief, who reports directly to Parliament, said cuts in local government spending had left less money available for social care.

The widely respected IFS said the next government will face two big problems: what role taxes should play in shrinking the deficit and how to manage the devolution of tax-setting powers to other parts of Britain. The government pledged to give more power to Scotland, Wales and Northern Ireland to undercut support for last year's referendum on Scottish independence.

No matter what promises are made ahead of the elections, though, history shows one thing is certain: the next government will increase taxes. After every election since 1992, the government has increased taxes by more than 5 billion pounds within 12 months, according to IFS.

While some of the coalition's innovations have been welcome, the government hasn't corrected long-term problems with the way tax policy is set, the IFS said in its pre-election analysis.

"Hyperactivity remains a concern with a perceived need to pull rabbits out of the hat," the IFS said. "So does short-termism, with a focus on firefighting and headline-grabbing rather than long-term strategy."


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