The Parent Trap

Marianne Curphey, The Guardian

December 10, 2003

This pre-budget report was primarily aimed at parents, says Marianne Curphey - but look closer and there were benefits for businessmen and significant changes to the pensions rules, too.

While the City tends to focus on Gordon Brown's borrowing levels and inflation targets, the chancellor always likes to throw in a few surprises for the ordinary taxpayer. This pre-Budget report was no exception - it was unashamedly aimed at parents and entrepreneurs, while also proposing some major changes to the pension rules.

If you are an amateur sports fan with a couple of young children and a job as head of a small science or technology business, then the chancellor had nothing but good news for you. Appealing to popular enthusiasm for sport following England's rugby world cup win in Australia, Gordon Brown announced he was going to do more to foster young sporting talent in this country. He is giving amateur sports clubs an 80% rate relief, which he hopes will encourage young people to become involved in local activities.

As a new father, the chancellor jokingly claimed that it was not the state of the economy or the opposition parties which were giving him sleepless nights. He had plenty of positive news for fellow parents with young children, claiming that a package of child benefits, worth 1bn a year, would help working families from next April. Currently, Britain does not have a good record on childcare: it is way behind countries like Sweden, for example, in terms of care and parental rights.

The increase in tax credits from the new tax year next April is another move which will benefit parents, as the child element will be increased by 13%. According to Mr. Brown, this will mean an extra payment for seven million children of 180 a year - which amounts to an extra 3.50 a week each. The maximum help for the first child will rise to 58 in April, and for two children to 100 a week. The chancellor claimed that both figures are more than double the amounts in place when Labour came to power in 1997. We should, however, be a little cautious about the detail of these claims. Gordon Brown has a habit of making bold assertions about the benefits of his budget policies in his speech which don't look quite so generous when examined in detail. He claimed that, before housing costs, a two-parent family on half the national income would be 75 a week better off from next April, with the aim of eradicating child poverty within a decade. "With the best schooling, services and financial support, every child has the chance to develop their potential to the full," he said, before outlining how every employer will be able to give childcare benefits of 50 a week for every employee, free of any national insurance.

The definition of approved childcare will be extended to include care at home, which the chancellor said would double the number of childcare places available to 1.5 million. While in theory this sounds great for individuals, particularly those who are trying to work flexibly, it could become a massive headache for employers.

Take the retail trade, for example, which has a huge female workforce, the majority of whom would probably like to take advantage of such a scheme. Even though employers will have a corporation tax reduction and pay no NI on the credits to staff, they are expected to fund it themselves. It could end up meaning that firms in certain parts of the economy face a sudden and substantial cost in setting up and running such a scheme. Flexibility for employees does not always spell more flexibility for employers.

Also published today were the government's new proposals for simplifying and changing the tax regime for pensions. This is the second draft of a consultation paper, with the government asking for responses by March next year. The possible changes to pension rules, discussed in both the first and second draft papers, include the cap on the maximum pension benefits available at retirement, greater flexibility within annuity rules and the opportunity for people to take a pension much earlier.

One of the most controversial proposals within the first draft had been the plan to cap the value of an individual's benefits at 1.4m, a move which the chancellor said would only affect 5,000 people. After representations from the industry he said today that he had asked the National Audit Office to examine this figure of those affected, and report back.

One concession being offered appears to be that the tax regime on the funds above the 1.4m would be a rate of 25%, rather than the 33% which was proposed in the first draft. Even so, this issue tends only to affect the very wealthy, since for the majority of Britons the problem is of under- rather than over-funding a pension scheme.

The chancellor hinted that the current state pension scheme was "sustainable", since it represented only 5% of gross domestic product (GDP), compared with three times that in Europe. However, the implications of not increasing those levels in this country mean that the state pension won't provide a particularly good income in the future. In the chancellor's eyes, while our fellow Europeans struggle against unsustainable (but more generous) state schemes, we are taking a more prudent line.

For entrepreneurs, the chancellor promised a further extension of tax credits for research and development - including help for the British film industry. He said red tape would be cut with the scrapping of 147 regulations, making this country able to compete on a global and European basis. This will be good news for small businesses in particular, which claim that bureaucracy and form-filling takes up a disproportionate amount of their time and makes them less competitive. The chancellor likes to think of himself as the catalyst for the creation of, and investment in, new businesses around the country. As a consequence, he announced a consultation on ways of encouraging real estate investment trusts, and incentives to fund start-up business via more generous tax break for venture capital trusts.

Overall, the pre-budget report was a little more subdued than usual - overshadowed by the fact that the many economists believe the chancellor is still too optimistic about economic growth. But he still found time to promise a freeze of duty on whisky, if a workable arrangement to stop spirits smuggling can be found with the drinks industry. 

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