UK Budget: Top-Rate Tax Cuts, Job Initiatives Expected

Chancellor of the Exchequer George Osborne is expected to strike a note of caution and keep the Treasury’s purse strings firmly closed in Wednesday’s Budget – despite the UK government’s borrowing figures coming in lower than expected.

Chancellor of the Exchequer George Osborne holds Disraeli's original budget box as he leaves 11 Downing Street for Parliament.
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Chancellor of the Exchequer George Osborne holds Disraeli's original budget box as he leaves 11 Downing Street for Parliament.

“This is no time for a spring spending spree,” Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club, wrote in a research note. “A giveaway would have a limited macroeconomic impact and would risk sending the wrong signals to the ratings agencies and financial markets. Instead we would like to see the Chancellor use his windfall as a buffer against any potential escalation of the euro zone crisis, and invest in small, low cost measures designed to boost the UK’s productive potential.”

Targeted support for the housing market, by encouraging new building businesses through tax incentives, could help boost employment numbers and the economy, the ITEM Club believes. The mortgage market in the UK is still moribund, despite a historic low in interest rates that has lasted for three years.

London's wealthy could be targeted with a 7 percent rate of stamp duty on homes sold for over 2 million pounds ($3.2 million), according to a report in the Financial Times on Wednesday morning.

And taxpayers could get an annual statement from the government giving a detailed statement of what their taxes are spent on.

Osborne said over the weekend that he wants to help less well-off families.

"My priority is to help low and middle earners. That is where the bulk of the effort in the budget is going to be," he told the BBC. "We want to see real and substantial progress on lifting low income people out of tax."

One measure that could potentially help out those at the lower end of the income scale is raising the level of income at which workers start paying tax up to 9,000 pounds ($14,300) per year. The cutoff currently stands at 8,105 pounds ($12,850).

Youth unemployment , currently at around 22.5 percent in the UK, is also high on the coalition government’s list of priorities. It is believed that Osborne could provide additional tax incentives for employers who take on unemployed young people, such as lowering National Insurance contributions.

The top rate of income tax is predicted to be cut from 50 percent to 45 or even 40 percent by the Chancellor.

UK businesses and Conservative politicians have been lobbying for an end to the 50 percent tax rate on income above 150,000 pounds ($235,500) a year since it was brought into effect two years ago.

“It is widely accepted that it actually brings in little revenue and maybe acts as a deterrent in attracting—or keeping—top talent to the UK; but scrapping it would be a high profile move and politically contentious given the ongoing message that the government is putting across that we are all having to make our fair share of sacrifices to improve the public finances. So the Chancellor would have to offset this by raising other taxes on the wealthy,” Howard Archer, chief European & UK economist at IHS Global Insight, wrote in a research note.

Methods of extracting more money from the rich could include raising annual taxes for the most valuable houses – although critics argue that this could penalize people living in cities like London, which have relatively high property values.

The Chancellor could also announce a new 100-year bond, according to reports last week.

Markets will also be looking for any significant changes to the economic outlook of the Office for Budget Responsibility, an independent body set up by Osborne’s government to monitor the economy and the public finances, on Wednesday.

The OBR revised its forecasts for 2012 down substantially to 0.7 percent in November.