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Osborne is facing balancing act in his Budget

With just over a year to go before the General Election, George Osborne will likely put politics to the fore in his fifth Budget on Wednesday, hoping he can convince enough voters that his policies are taking the country's economy in the right direction.

PLAYING POLITICS: George Osborne will aim to convince voters his Plan A is working. Picture: Getty
PLAYING POLITICS: George Osborne will aim to convince voters his Plan A is working. Picture: Getty

He will be looking to strike the right balance between sensible housekeeping and policies which promote continued economic growth while, at the same time, ensure he is being seen by the wider electorate to be cracking down on individuals and employers not paying their fair share in tax.

Almost all commentators would agree that we are seeing a significant improvement in the UK economy, including encouraging signs for Scotland. The UK is back to pre-recession growth levels, forecast to outperform the rest of Europe in the year ahead.

Overall, there is a notable step change in business confidence and we have witnessed that here in Scotland, with our firm increasingly active in the deal market over the past nine months. We will certainly see further attempts to close tax loopholes used by companies and higher earners. The new rules governing the taxation of Limited Liability Partnerships, for example, could find mainly higher-earning individuals being re-classified as being employed rather than self-employed, a change which could have a significant impact on their annual tax liability. Mr Osborne will also likely reiterate his 2013 Budget announcement to target the use of schemes such as offshore employment intermediaries, which have been set up by some firms to avoid PAYE and NIC.

Alongside these measures to tighten up on avoidance, the Chancellor will be looking to keep UK investment levels on the rise. With this in mind, it is likely we will see an extension to the annual investment allowance of £250,000 beyond this calendar year allowing businesses to get a 100% tax deduction for capital expenditure.

Although the outlook is positive, this recovery remains a fragile one, so many in the business community will be hoping to see a sensible Budget without huge pre-election giveaways. The further raising of the personal allowance, a measure which the Liberal Democrats have been driving, is certainly an odds-on favourite but I suspect that Mr Osborne may also want to raise the 40% threshold to support the increasingly "squeezed middle" while, at the same time, diffusing cost of living arguments which are being fielded by Labour.

Given the sensitive nature of the recovery, the business community will be hoping that Mr Osborne will leave existing corporate finance initiatives alone. The Business Growth Fund and Funding for Lending Scheme are two examples of Government-supported incentives which have been successful in helping to get funds into UK companies. Any diminishing of these schemes could stifle the current upturn and should be resisted.

What is certain is that the Chancellor will use his Wednesday Budget speech as a platform to promote the success of austerity policies. With economic forecasts and a number of positive business confidence surveys to quote from, he also won't miss the opportunity of underlining the politics behind the emerging upturn.

These politics could also touch on Scotland in advance of September's independence referendum with some real potential for Mr Osborne to make some political points in an attempt to thwart the Yes campaign. He may, for example, look to further reduce corporation tax to 20% and challenge the First Minister on whether he could he match this in an independent Scotland.

Although Scotland has fared relatively well, there is still a significant gap between the recovery north of the Border and London, as highlighted last week in Strathclyde University's Fraser of Allander Institute report. Mr Osborne may take this Budget and the particular sensitivities around timing to extend the Government's regional incentive programme through increased regional selective assistance grants, cash subsidies and targeted tax reliefs for investment. This would be widely welcomed in Scotland by the business community, although I suspect the Yes campaign may be sceptical of the timing.

As we approach the independence vote and the 2015 General Election, the Chancellor will want to demonstrate that we are starting to see a gain from the pain of the past four years of Government restraint but he will also not want to start giving away too many sweeteners which could halt the recent progress. Like most Budgets, this one will be a tricky balancing act.

Mark Houston is Glasgow managing partner with Johnston Carmichael Chartered Accountants

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