Chancellor Gordon Brown has done what most commentators least expected from his third Budget. He held the biggest shock until the closing moments of his statement, when he announced a 1p cut in the basic rate of income tax. Along with other tax moves, it amounts to a 4bn giveaway, and a similar amount is to be ploughed into public spending projects such as health, education, training and computers for all.
While many of his Budget points were well flagged, such as a ten per cent basic rate of tax, the abolition of mortgage interest relief and a reduction in excise duty for small cars, the Chancellor managed to hold back the big news for Budget day.
Opposition criticisms that Brown’s Budget is “smoke and mirrors” has some credence. Cutting the basic rate by 1p and introducing a 10 per cent basic tax rate involves getting rid of the 20p rate of tax, making it hard to work out exactly how much people will benefit.
The “creeping” redistribution of wealth appears to be gathering pace. For people on lower incomes, a quick course in welfare benefits may be advised, as they fight through the thicket of tax credits and benefits now on offer. But poorer families will be better off.
There is a corresponding erosion of privileges for the better off, such as abolition of mortgage tax relief. The overall shift in favour of lower income groups should benefit retailers, as poorer people spend their income rather than save it. It will correspondingly hit savings and the financial services industry, although the introduction of individual savings accounts (ISAs) in April may enlarge the number of savers.
But the financial services industry was caught unaware by Brown’s plan for league tables to cover life insurance, pensions and savings. Sara Weller, retail marketing director for Abbey National, says: “It is great in principle if he is able to find a mechanism to cover accessibility, charges and particularly long-term performance. It is an interesting development to try to prevent a repeat of mis-selling.”
Moves to improve the transparency of mortgage selling were less of a surprise, as Weller had been involved in consultation. The move will crack down on over-complicated mortgage packages. The measures to increase share ownership should also have a knock-on effect for the financial services industry.
According to Clive Parritt, chairman of accountants Baker Tilly, there are “potentially expensive hidden extras for the marketing industry.” One is the imposition of national insurance of benefits in kind – with perks such as medical insurance likely to be hit.
As usual, marketers of specific sectors – particularly alcohol, tobacco and cars – had plenty to complain about.
But the tax-cutting element of the Budget must be good overall news for marketers and retailers, who face the prospect of deflation over the next two years – or at least flat prices. Making price rises stick is hard enough. Douglas McWilliams, economist for the Chartered Institute of Marketing, says: “The economic situation is a result of a sociological trend. Consumers are more educated and self-confident, and they now realise they do not have to buy goods if they think they are too expensive.”
With more money in consumers’ pockets, marketers will no doubt already be looking for new ways of getting them to part with it.