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The Budget of 2009 will long be remembered as the time when New Labour abandoned its pledge not to increase income tax for higher earners.

But at a time when the electorate in general is less than enamoured with higher earners – especially those in the City – perhaps this is a calculated gamble by Labour that could pay off.
We look at the key points of the Budget and their possible effects.

Tax

The new rate of income tax for those earning ₤150k-plus has been increased from 45% to 50% from April 2010. For those on more modest salaries (and no doubt a large percentage of traditional Labour voters) the decision to tax the better off will be welcomed.

But there is a double whammy for higher earners as the government has announced that tax relief on pensions for people on more than £150,000 a year will be reduced.

Andy Merricks IFA and investment specialist with Skerritt Consultants thinks the measures are a populist pre-Election ploy but that in the long run taxes will have to increase across the board to pay for the governments colossal borrowings.

“The 50% tax on higher earners will not even scratch the surface when it comes to trying to pay for the level of borrowing the government is committed to. I think in future there will have to be general tax hikes.”

Savings

The rise in the ISA limit to ₤10,200 (with ₤5,100 allowed in cash) will be broadly welcomed as investors have long called for the government to increase limits by a meaningful amount rather than merely tinkering with things. Merricks agrees the new limit is a good thing but questions why it has to be staggered in such a way. “Why does it have to be for over 50s initially (for this year) and then everyone else a year later. Why complicate it? In terms of a meaningful difference for those invested in cash, at present, with interest rates where they are, you are probably only looking at being ₤25.50 better off over a year. For those looking to invest in unit trusts or corporate bonds, the increased limit does make a difference, so it is largely a good thing.”

Housebuyers

The Budget confirmed a scheme to guarantee mortgage backed securities to boost lending. There is also an extra £80m for a shared equity mortgage scheme; £500m to kick-start stalled housing projects and £100m for local authorities to build energy efficient homes. But housebuyers will be disappointed more was not done on stamp duty. The Chancellor did announce that the stamp duty holiday for homes up to £175,000 would be extended to end of year

Merricks sees little in the government’s measures to get the housing market moving again. “If the government were serious about lowering stamp duty to encourage housebuying they would need to increase the threshold to ₤300k or ₤350k. At the end of the day stamp duty is largely irrelevant if you can’t get a mortgage in the first place or you are concerned about losing your job.”

Families

Given that last year’s Budget was hailed as a ‘Budget for families’ there is not a huge amount in there this year for families. The Child tax credit is to rise by £20 by 2010. Also Child trust funds for disabled children will rise by £100 a year and £200 a year for severely disabled children

Pensioners

The Budget confirmed that grandparents of working age who care for their grandchildren will see that work count towards their entitlement for the basic state pension Winter fuel allowance is to be maintained at higher level - £250 for over 60s and £400 for over-80s - for another year The Chancellor also promised that the basic state pension will be increased by at least 2.5%, regardless of inflation. Given that inflation is expected to be 1% this year; the VAT cut will continue until December and prices of most retail goods are expected to be kept in check, pensioners should be better off in 2009/10. But of course all that depends on whether you like a drink or a cigarette and whether you drive a car (see below).

Cigarettes and Alcohol

There is seldom a Budget that doesn’t have bad news for drinkers and smokers and this one is no exception. Alcohol and cigarettes taxes to go up 2% - so from tomorrow you might find yourself paying 5p more on a pint of beer

Petrol

Car drivers haven’t come out of this Budget unscathed either, fuel duty is to rise by 2p per litre from September. “This rise in fuel could have a real impact,” says Merricks, “it is the old scenario of giving with one hand and taking away with the other.” One good piece of news for car buyers though is that from next month until March 2010 motorists can get £2,000 discount on new cars if they trade in cars older than 10 years

The Economy

Looking at the overall picture post-Budget the over-hanging question will be whether the Chancellor’s forecasts for recovery are on the money or hugely optimistic. Alistair Darling predicted in his speech that whilst the economy will slow 3.5% this year he expected the economy to start to grow by the end of the year. He also forecasted the economy to grow by 3.5% annually from 2011

Merricks is sceptical about the Chancellor’s forecasts. “Where do these forecasts come from? They seem to be plucked out of mid air” He adds: “I think the growth forecasts are hugely optimistic and am very worried about the huge levels of borrowing.” The Budget speech said public borrowing would increase to £175bn this year and that borrowing levels would be £173bn, £140bn, £118bn and £97bn over the next four years.

“The bottom line is that at some point we are likely to see taxes rise to pay for the spending,” Merricks adds. Of course it may not be a Labour government that has to raise these taxes in the future – watch this space!