Morning Line: benefits, CGT and pensions – none of it is set in stone

How different will the government’s money-raising plans look in a year’s time? The coalition government labelled it an ‘emergency Budget’ – a series of measures taken at a time of extreme stress, involving significant political compromise.  

The measures were well-received. A rise in VAT will not cause rioting in the streets and the capital gains tax (CGT) increase was not as bad as thought - a rise to 28% rather than 40%.

But like many other aspects of the emergency package, these tax changes could be significantly revised. The Budget needed to be rushed out in six weeks, by a government glued together to win an election, and it needed to please the markets, in particular the ratings agencies, while tallying with the 80/20 spending cuts/tax mix favoured by chancellor George Osborne.  

It is still very much a work in progress; the news is moving very quickly and just a week after the Budget announcement – wiped from many Brits’ minds by England’s disastrous World Cup campaign – the set of tax rises and spending cuts is starting to look very different.

Osborne’s benefit cuts are a case in point. Having already announced several changes to benefit payments in the Budget, the chancellor has now said that incapacity benefit would also be targeted.  Some 2.6 million people are on incapacity benefit or employment support allowance at a cost of about £12.5 billion a year.

The Times has reported that Osborne thought it too brutal to include a crackdown on incapacity benefit in last week’s Budget in which he also announced a strict new test for people claiming Disability Living Allowance.

Some reckon that the lower-than-expected CGT increase is one area that is already looking vulnerable to change. Accountant Marios Gregori points to a HMRC document issued after the Budget which does not rule out the possibility of further rises in next year’s Budget. The coalition did after all say that it would restore the link between CGT and income tax

And what of the hard line on the public sector? In the Budget Osborne laid out plans to cut spending in government departments by up to 25% as part of the government’s plan to slash public spending by over £100 million in the next five years. The government has also promised a ‘root and branch’ inquiry into public sector pensions which will feed into the spending review in October. But there could be a concession here. The Daily Telegraph has reported that the prime minister’s advisers believe that widespread industrial action can be avoided if public sector workers are offered a deal over pensions.

Don’t expect the economic growth forecasts, produced by the Office of Budget Responsibility but announced by Osborne in the Budget, to last very long either. Sir Alan Budd, who heads the group, has already said that there was scope to cut or raise the forecasts. 'We just don’t have enough information to know one way or the other,’ he told Citywire.

Of course the government should be ready to change its Budget proposals. While there are political motives behind its actions, it is doing the right thing by consulting over spending, watching the state of the economy and stringing out the news in order to avoid any shocks.

Governments have always committed abrupt U-turns on what seemed core policies, but in this new coalition world – one in which the economic challenge is so dire – savers and investors need to remember that nothing is certain.