Pre-Budget Report 2009: The speech

The Pre-Budget Report 2009 comes at a critical time for the Government, with the UK economy still mired in what is proving to be the longest recession on record (external website), and the small matter of the 2010 general election - the last possible date for which is Thursday 3 June 2010 (external website) - looming on the horizon.

As Sunday Times economics editor David Smith puts it, the challenge facing the Chancellor in framing the Pre-Budget Report 2009 (external website) is to master the precarious balance between "honesty on the public finances and not scuppering Labour's election hopes".

A "neutral" Pre-Budget Report

Darling referred to the Pre-Budget Report as a "neutral" one. He summed up the Pre-Budget Report 2009 as coming at a time at which the UK faces a choice between "securing recovery or wrecking it".

The Pre-Budget Report 2009 represented a mix of realism on the state of the economy and political expediency with an eye on the fast-approaching 2010 general election. As Sunday Times economics editor David Smith put it, the challenge for the Chancellor in framing the Pre-Budget Report 2009 (external website) was to master the precarious balance between "honesty on the public finances and not scuppering Labour's election hopes".

Darling acknowledged that "tough choices" need to be made on public spending. The Pre-Budget Report 2009 is not the first time this year that Darling has alluded to the necessity for "tough choices". Back in July 2009, Darling indicated in an interview with Sky News that he was then in the middle of making tough decisions on the future course of public sector pay awards (external website). And over the few days leading up to the Pre-Budget Report 2009, both Alistair Darling and Gordon Brown have started to set out what shape these "tough decisions" might take (external website).

But crucially, some of the toughest choices - which are expected to hit public sector jobs hard - have been deferred. It remains likely that public sector workers will be expected to share the burden of severe pay restraint and job cuts that have beset the private sector during the recession. Yet it is unlikely that these decisions will be addressed directly until after the 2010 general election - by which time the possibility remains that they will have become David Cameron's and George Osborne's problem.

Pre-Budget Report 2009: Key points for HR

Shortly before Darling stepped up to speak, Prime Minister Gordon Brown stated that a key theme of today's Pre-Budget Report would concern "recovery from recession by investing in the future".

Darling started by setting out the tough choices faced in framing the Pre-Budget Report. These involve balancing the need to ensure economic recovery with halving the budget deficit over four years.

According to Darling, global confidence is now returning. UK economy will start growing "by the turn of the year ... [but] ...we can't be complacent. To cut support now could wreck the recovery."

The economy

• Economic growth: The economy - as measured in terms of growth in gross domestic product (GDP) is set to contract by -4.75% over the course of 2009 as a whole.
• Growth to resume in Q4 2009, with GDP rising by between 1% and 1.5% over the course of 2010. Budget 2009 forecasts for growth of 3.5% in 2011 and 2012 unchanged. Future growth to come from "more varied sources", not just financial sector.
•  This means that the Chancellor has significantly revised downwards his growth forecast for 2009, which was -3.5% in Budget 2009, but future years' forecasts are unchanged.
• This conviction that GDP will achieve above-trend growth in the medium-term echoes comments made by Bank of England executive director and chief economist Spencer Dale (PDF format, 39.4K) (external website) in a speech last week: "It is likely that, as the recovery takes hold, output will grow at rates above its historical trend for a while."
• The central projections for economic growth set out in the Bank of England's November 2009 Inflation Report (PDF format, 2.8MB) (external website) were for 2.1% GDP in 2010, rising to 4% in 2011.
• Consumer prices index (CPI) inflation: CPI inflation - the Government's preferred measure - currently stands at 1.5% (as at October 2009), some 0.5 percentage points below the target rate of 2%. Darling predicts that CPI will rise to around 3%, before falling back sharply, to average 2% in 2010 and 1.5% in 2011.
• Retail Prices Index (RPI) inflation expected to average 0.5% in 2009, 2.5% in 2010 and 3.5% in 2011.

Public spending 

• Stick with public spending plans for next year. But once recovery is more certain, public spending to be reduced.
• Need to make right choices to reduce the deficit. Low inflation and low interest rate environment, alongside "most flexible labour market in Europe" will help shore up UK economy and secure inward investment. Measures to support high-tech industries. Two-thirds of targeted measures come from existing budgets.
• Public sector pay rises to be capped at 1% for the two years from 2011, but recognising the "special circumstances" of the armed forces.
• Public sector workers to make a greater contribution to their pensions, with those earning over £100,000 paying more.
• HMT approval required for all public sector appointments on salaries greater than £150,000 per year and bonuses over £50,000.
• Guaranteed increases for frontline services, including NHS, police and education.
• Government borrowing: To be reduced from 12.6% of GDP in 2009 to 5.5% of GDP by 2013/14 and to 1.9% by "end of the forecast period".
• A Fiscal Responsibility Bill to ensure that public sector net borrowing as a share of GDP is more than halved by 2013/14.
• Budget deficit: The budget deficit for 2009 stands at £178bn (up from £175bn in Budget 2009), falling to £176bn in 2010, £140bn in 2011, £117bn in 2012, falling below £100bn in 2013/2014.

Taxes and benefits

• "Tough decisions on tax" required to help sustain economic recovery. Burden on public finances of support to banks has been onerous.
• "The broadest shoulders must bear the biggest burden." - Tax measures to target highest earners.
• Banker's bonus tax: A one-off super-tax of 50% on individual discretionary bonuses at all banks to take immediate effect. To be paid by the bank, not employees.
• Darling stated that banks can chose to use their profits to build up their capital base, but if they instead insist on paying substantial rewards he is determined to "claw money back" for the taxpayer.
• Tax to yield an estimated £0.5bn, to be reinvested in helping the unemployed.
• Income tax: No rate changes but threshold for top 40% rate to be frozen for one year in April 2012.
• National insurance: 0.5% rise in employer, employee and self-employed national insurance contributions (NICs) from April 2011.
• Inheritance tax: Married couples can continue to combine allowances.The current £325,000 threshold for inheritance tax will be maintained.
• VAT: Darling confirmed that the 2.5% reduction in VAT will be withdrawn from the end of this month. VAT will consequently revert from its current rate of 15% back to its previous 17.5% level, with effect from 1 January 2010.
• Business support schemes: The Enterprise Finance Guarantee scheme (PDF format, 1.7MB) (external website) - which increases availability of credit to businesses, and which was due to be closed in March 2010 - will now be extended by 12 months. The 'Time to Pay' tax scheme will be extended "for as long as it is needed." Increase to corporation tax for small businesses to be deferred.
• Basic state pension to rise by 2.5% from April 2010 (rather than being linked as usual to September 2009's RPI which was -1.4%).
• Child benefit and some disability benefits to rise by 1.5% in April 2009.
• Easier access to loans and credits for SMEs
• 'Green' company car tax breaks: Five-year exemption from company car tax to promote use of electric cars in company car fleets.

Unemployment

• Darling: "The reduction in global demand will have an impact on jobs for some time to come. [Unemployment] will keep rising for some time. [...] Unemployment can never be a price worth paying."
• £30 million to help with jobs in Teesside in the wake of the Corus plant closure.
• Unemployment "has increased much less than expected". If we had seen the same rate of job loss relative to GDP as seen in the 1990s, job losses would be four times what they have been.
• Guarantee of a place in education or training for all 16 and 17 year-olds renewed for an additional year from September 2010.
• Budget 2009 pledge of guaranteed employment or training for all those under 24 who have been unemployed for 12 months will now take effect after 6 months' unemployment.
• New advanced apprenticeships to provide skills needed in growth sectors such as advanced manufacturing and low carbon, digital technologies.
• Additional financial support to help those from low-income backgrounds get a taste for "careers they might otherwise not have considered."
• Specialist support and training for long-term unemployed aged 50 and over.

Environment

• Green industries to be supported by redirecting funds to invest in low-carbon projects and in 2020 fund.
• 'Green' company car tax breaks: Five-year exemption from company car tax to promote use of electric cars in company car fleets.
• Investment in carbon capture technologies to be doubled.
• Smart-meter roll-out to be completed in 2020.

Pre-Budget Report 2009: XpertHR resources

• Pre-Budget Report 2009: The Employment Intelligence perspective Read relevant blog posts from XpertHR Employment Intelligence.
• Budget Report 2009: No silver lining (subscription required) We look in detail at the Chancellor's Budget 2009 report, focusing on the proposals of most interest to pay and HR professionals.

Pre-Budget Report 2009: External resources

• Pre-Budget Report 2009: Full speech View the complete speech with the BBC i-Player.
• HMTreasury: 2009 Pre-Budget Report Visit the official Pre-Budget Report 2009 microsite, on the HM Treasury website.
• Pre-Budget Report 2009 (PDF format, 3.9MB)