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PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
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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