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Cablegate: Uk Announces 2008 Budget - Key Points

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PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHLO #0749/01 0731134
ZNR UUUUU ZZH
P 131134Z MAR 08
FM AMEMBASSY LONDON
TO RUEHC/SECSTATE WASHDC PRIORITY 7776
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHBL/AMCONSUL BELFAST 0985
RUEHED/AMCONSUL EDINBURGH 0880

UNCLAS SECTION 01 OF 02 LONDON 000749

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ETRD CASC EINV UK
SUBJECT: UK ANNOUNCES 2008 BUDGET - KEY POINTS

LONDON 00000749 001.2 OF 002


1. (U) Summary: Alistair Darling announced his first budget as
Chancellor of the Exchequer on March 12. The budget forecast revised
growth downward and predicted that inflation will rise above the
Bank of England's two percent target. However, Darling took care to
emphasize that the UK's economic fundamentals are strong and compare
favorably with other G7 economies. As expected, Darling announced
increased funding for the military. The non-dom tax changes will
take effect in April as originally proposed despite months of
protests from a plethora of business groups. HM Treasury (HMT) is
sending out mixed signals on competitiveness by lowering corporation
taxes while raising capital gains tax rates. The budget includes 800
million BPS ($1.6 Billion USD) for the upstart clean technology
fund. Darling highlighted HMG's cooperation with the U.S. on
developing environmentally friendly technologies. Darling emphasized
HMG's commitment to an open economy, trade and investment, and
reiterated government support for the WTO DDA negotiations. End
Summary.

Economic Forecasts
------------------

2. (U) Darling cut 2008 UK growth forecasts to 1.75-2.15 percent,
compared to previous HMT forecasts of 2-2.5 percent. He expects
growth to rise to 2.15-2.75 percent in 2009 and 2.5-3 percent in
2010. Darling forecasts inflation to rise above the Bank of
England's 2 percent target in the short term as higher food and oil
prices feed through into domestic inflation. However, he expects
inflation to return to target in 2009 and to remain on target
thereafter. Darling confirmed that the inflation target for the
Monetary Policy Committee will remain at 2 percent on a CPI basis.
The UK's current budget balance this year is in line with the
Pre-Budget Report projection at minus GBP 8 billion ($16 billion).
Next year it will be minus GBP 10 billion ($20 billion), returning
to surplus in 2010 of GBP 4 billion. Borrowing is forecast to rise
to GBP 43 billion ($86 billion) next year, approximately 2.9 percent
of national income, but is expected to fall to 1.3 percent by
2012/2013. Debt is projected to be 38.5 percent of GDP in 2008/2009
and 39.3 percent by 2012/2013. The Chancellor confirmed that the
"Golden Rule" was being met with the current budget in surplus over
the economic cycle. He said that borrowing for investment means
that the second fiscal rule, the "Sustainable Investment Rule" would
also be met each year and over the economic cycle.

Defense
-------

3. (U) On the Defense Budget, Chancellor Darling announced that GBP
2 billion ($4 billion) will be spent supporting UK troops on the
front line. This will include approximately GBP 900 million ($1.8
billion) on military equipment. In his speech to the House of
Commons, Darling said that the Defence Budget has seen the longest
period of increased spending in a generation and he took the
opportunity to pay tribute to UK service men and women in Iraq and
Afghanistan.

Non-Doms
--------

4. (U) Darling announced that the proposed non-dom tax changes will
take effect in April as proposed in the pre-budget report and
consultation paper. (add in reftels) He did not further elaborate,
nor did he mention as expected anything on the creditability of the
new taxes against U.S. tax liabilities. Darling emphatically
announced that there will be no further changes during the next two
parliaments.
(Note: The budget document (www.hm-treasury.gov.uk/budget) goes into
slightly more detail confirming that any non-domiciled individual
who was resident in the UK seven of the last ten years will either
have to pay UK tax on their worldwide income or a 30,000 GBP
($60,000 USD) tax charge if they wish to continue on the remittance
basis of taxation. Previously, non-domiciled residents of the UK
only had to pay UK income tax on their domestically earned income
and any monies remitted into the UK. After the speech, an HMT
official pointed us to an opinion by U.S. tax law firm Skaddden Arps
which concludes that the UK proposal should be creditable against
U.S. taxes. The Skadden opinion is on the HM Revenues and Customs
website, at www.hmrc.gov.uk/budget2008/bn107.pdf

Competitiveness
---------------

5. (U) Corporation tax will decrease to 28 percent from 38 percent
starting in April 2008. Smaller firms will have simplified tax
filing requirements. HM Treasury is, however, increasing the
capital gains tax rate from 10 to 18 percent. This will apply to any
disposal after April 6, 2008. However, Darling also announced an
"entrepreneur relief" scheme. Any individual who disposes of a
trading business or shares in a trading company will only pay 10

LONDON 00000749 002.2 OF 002


percent capital gains tax as long as they are an employee or officer
of the company and own at least a five percent stake in the firm.

Environment
-----------

6. (U) The Chancellor continued to stress the government's green
credentials. He highlighted the BPS 800 million that the Treasury
has dedicated to the Clean Technology Fund to assist developing
countries with acquiring "green" technology and adapting to climate
change. (Note: The Clean Technology Fund was first proposed by Sec.
Paulson as an incentive for developing countries to reduce their
emissions by adopting the latest technologies. It is part of the
Major Economies Meetings process.) He also noted that BPS 26
million has been set aside for the Green Homes Service, a pilot
project that helps homeowners with the installation of more
efficient and energy-saving technologies, as well as the increase in
the climate change levy in line with inflation. Darling also
unveiled future initiatives, such as the re-introduction of a levy
on single-use plastic shopping bags, a zero-carbon initiative for
non-domestic buildings, a change to the vehicle excise tax that will
favor more efficient vehicles, the inclusion of aviation emissions
in the European Union Emissions Trading Scheme (EU-ETS), and the
replacement of the biofuels duty differential with a Renewable
Transport Fuel Obligation.

Housing
-------

7. (U) HMG is pushing to make it easier for its citizens to purchase
a home, which could have broader macroeconomic implications. Darling
said they have identified potential sites for 70,000 new homes. HMG
also wants to encourage more long-term fixed rate mortgages, which
they believe will reduce risks for first-time home buyers. (Note:
Currently, most mortgages in the UK have variable rates.) Darling
also proposes easing loans for key workers, such as teachers and
nurses, and reduces the property tax burden on new home buyers.

Comment
---------

8. (SBU) There were few surprises in Darling's budget. The downward
revisions to the economic forecast, the announcement of the non-dom
tax changes, and the emphasis on climate change were widely
expected. However, the lower corporation tax was new and, combined
with the increased capital gains tax, sends a mixed message to the
business community of the UK as a destination for investment.

TUTTLE

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