The AA warned over the weekend that the chancellor is considering raising the basic rate of insurance premium tax (IPT) from 9.5 per cent to 12.5 per cent when he delivers his sixth Budget on Wednesday. Just last November, Osborne increased the basic rate of IPT from 6 to 9.5 per cent – meaning that the tax on more than 50m motor, home, medical and pet insurance premiums could be set to double in less than six months.
“It’s ridiculous that the insurance industry is singled out in this way,” AA president Edmund King said. “Car insurance is not a luxury but a legal necessity so should not be taxed like a luxury.”
A spokesperson for the Association of British Insurers (ABI) agreed, telling City A.M.: “Any rise in IPT would pile more financial pressure on the millions of families and firms who have done the right thing and taken out insurance.
“Protecting against life's uncertainties should not be penalised through higher insurance bills.”
According to the ABI, the initial rise in tax is estimated to have added around £100 to the average household's annual insurance bill, and will cost firms an extra £500m in higher commercial insurance premiums each year.
When Osborne first announced plans for the initial tax hike at last year’s summer Budget, the government said the higher tax rate would bring in an additional £8.1bn for the Treasury by the end of the decade.
Meanwhile, City sources said they expect the chancellor to announce plans this week to collect more revenues from British banks.
At last year’s summer Budget, Osborne unveiled a new bank tax surcharge, taking an additional eight per cent of banks’ profits each year for the government, on top of the existing corporation tax. At the time, the Office of Budget Responsibility (OBR) said the new tax, combined with the phasing out of the bank levy, would raise another £1.7bn for the Treasury.
But experts at EY have cautioned that the OBR forecasts have likely underestimated banks’ balance sheets, claiming that the tax take from the entire sector could be nearly £6bn by the end of the decade.
Duties on tobacco and petrol are also apparently in the firing line for this year's Budget, with multiple reports over the weekend indicating that Osborne may increase so-called "sin" taxes, with the introduction of a minimum price for cigarettes, as well as capitalise on low oil prices by raising the level of fuel duty – a tax that has been frozen for the last five years.
Osborne warned over the weekend that a slowdown in global growth would lead to further fiscal tightening, telling the BBC: “ My message in this budget is that the world is a more uncertain place than at any time since the financial crisis. We need to act now so we don't pay later.”
Osborne said he would slash 50p in every £100 the government spends by the end of the decade, or around £4bn, from the government’s balance sheet.
Osborne is under increased pressure to meet his target of balancing the budget by the end of the parliament, after revealing that £18bn has been revised off Britain’s nominal GDP. The UK economy grew by 2.2 per cent in 2015, weaker than the 2.4 per cent projected by the OBR. The OBR is also expected to downgrade its outlook this week to 2.2 per cent for this year, from a projection of 2.4 per cent in November’s Autumn Statement.
But economists at EY are warning today that while the OBR is “expected to deliver a gloomy verdict”, Osborne should avoid announcing more austerity measures.
“The chancellor has spoken before about fixing the roof while the sun shines. But, with storm clouds gathering over the UK economy, tightening fiscal policy further could worsen an already fragile economic situation,” said EY ITEM Club senior economic adviser Martin Beck. “Now is not the time to be fixing the roof.”
A Treasury spokesperson declined to comment.