---- by PAN PYLAS ---
LONDON (AFX) - Chancellor Gordon Brown is expected to announce around 5 bln stg worth of tax increases in Wednesday's budget, primarily to help pay for additional health spending in the UK. Hopes that Brown's budget will help slow down domestic demand are wide of the mark, economists said, given the expectation that most of the tax rises will be delayed until next year. Consumers are also more resilient than they were, and tax increases would merely lower the savings ratio, they added.
Brown's main motive in raising taxes isn't to effect changes in consumption but to help pay for sustained increases in National Health Service spending through to the next election.
Brown has already urged his Cabinet colleagues to curb their spending plans, adding that he wants to plough a "greater share of national income" into health, meaning the other departments reining in their demands. This budget will be a precursor to this summer's comprehensive spending revi ew, which will outline the government's plans for the three years to 2005/6.
In his pre-budget report last November, Brown put tax hikes back on the political agenda, when he said a "modernised national health service will need greater capacity and significantly more long-term investment".
In addition, Prime Minister Tony Blair has committed the government to raising the proportion of national income spent on health to the EU average and in an article in yesterday's Observer newspaper he contrasted Conservative "short-term tax cuts" with Labour's commitment to "investing in the future".
"With the public finances requiring a boost and a slowing of the consumer (spending) desirable, this would be an ideal time to raise taxes, particularly given the timing of the electoral cycle," said Deutsche Bank economist Ciaran Barr, who anticipates some 5 bln stg worth of tax increases. Some economists think there's little need for Brown to raise taxes, especially as the public finances are expected to be better-than-anticipated. With one month's data still outstanding (these will be published on the morning of the budget), public sector net borrowing looks likely to record a small surplus in 2001-2 against a 2.5 bln deficit anticipated. "Some unwinding of the conservatism in the Treasury's November borrowing forecasts, plus modest tax increases amounting to 2-3 bln stg should allow the Chancellor to present an improved fiscal background and find some cash for long-term spending commitments," said Investec economist Philip Shaw. Earlier this year, the Institute for Fiscal Studies, the well-respected think-tank, said Brown could throw some caution to the wind by not raising taxes, but indicated that he would be more inclined to raise taxes by 7 bln if he wants to maintain a cautious approach to the public accounts as well as fund health improvements and pay for the new tax credits for low-income families. Merrill Lynch economist Ian Stewart noted that without some tax increases the government "runs the risks of having to squeeze public spending or breaching its own rule on borrowing in 2004 and 2005 -- both undesirable ahead of the next General Election". He's also expecting 5 bln stg worth of tax hikes, primarily on the consumer sector. Observers think the most likely change will be on national insurance contributions, possibly by increasing the upper earnings limit, or getting rid of it altogether. NICs are meant to entitle people to benefits like the state pension, jobseekers allowance and maternity pay but have effectively become part of the overall tax pot. This will hit those who earn 30,000 stg and above and effectively wipe out any tax breaks they receive, as happened in 2000 when the last increase was quietly imposed. Increasing the rate on employee contributions by 1 pct to 11 pct would raise around 3 bln stg while increasing Class 1 employer contributions could raise another 3.7 bln, a Treasury spokesman said. "Our view is that National Insurance is likely to be the focus of any revenue raising measures," said Merrill Lynch's Stewart. "But there is no immediate need to raise taxes, so any significant changes may not become effective until 2003 and even then may be introduced gradually." Other tax-raising measures, such as increasing value added tax or petrol duties may be resisted, though stamp duty on houses may be extended given the strength of the housing market. Tobacco duties are also unlikely to rise too much given that too big a hike may encourage more smuggling. Increases in value added tax or extending VAT to new products are also likely to be resisted. Brown is also expected to announce a package of measures to help protect low-paid workers from the higher taxes. An increase in the minimum wage is one measure that may be announced. Aside from the tax issue, the budget will also outline the Treasury's economic forecasts for the year ahead. Investec economist Philip Shaw thinks the growth forecast for 2002 of 2.0-2.5 pct and the inflation forecast to remain unchanged. However, modest (2 bln) tax increases and a reduction of the "excessive conservatism" of the pre-budget report forecasts, should allow Brown to present "improved borrowing numbers, despite the pressures to raise spending, said Shaw.