Taxing times: Budget 2012

As the Budget approaches, Lucy Mair looks at Osborne's options for stimulating the economy and creating jobs

There's still a month to go until Chancellor George Osborne makes his annual Budget statement to parliament on 21 March, but predictions are already being made about the contents of his Budget box. Official figures released by the Office of National Statistics (ONS) in February showed that the chancellor paid off �7.8 billion of the UK's debts in January - exceeding his target of �6.3 billion. The extra revenue came from the strength of tax receipts, which hit a monthly high of �61 billion in January, prompting suggestions that Osborne now has some room to introduce tax relief in the forthcoming Budget. But, in a subsequent announcement, the chancellor warned speculators that �the British government has run out of money", and that the best hope of stimulating the economy and boosting jobs creation would come not from his Budget, but from investment by the private sector. Nonetheless, he's expected to make a number of policy changes to try to encourage economic growth.

Disposable income

Darren Winder, chief economist at Oriel Securities, has suggested to the Telegraph that the chancellor is most likely to use the economic leeway gained from January's high tax receipts to pay for a further increase in the personal allowance, the income you can receive on which no tax is payable. Raising the personal allowance would take more of the country's lowest earners out of tax altogether and provide a short-term boost to the economy by increasing their spending power. If this measure goes ahead in the Budget, it will be welcome news to struggling families and young people on low incomes. From April, the personal allowance is already set to rise to �8,105, but this could be raised again to �9,000 - moving closer to the �10,000 personal allowance that the Conservative election manifesto promised to achieve by 2015.

However, the impact of any rise in the personal allowance is likely to be offset by high value-added tax (VAT), which, by all predications, will remain at its current rate of 20 per cent. Furthermore, Osborne has indicated that there will be no further cuts to fuel duty in March's Budget, as had been hoped. Motoring groups have warned that the high cost of fuel is hurting the economy and having a disproportionate effect on families, as the price of petrol has risen by 20 per cent over the past two years. But Treasury officials have indicated that cuts to the fuel tax have been ruled out because Osborne cut it by 1p per litre in his budget last year, and has already delayed a 3p per litre increase until this August.

Creating jobs

To tackle the UK's high rate of unemployment, which currently stands at 8.4 per cent - a 16 year high - according to the ONS, Osborne has come under pressure from the Confederation of British Industry (CBI) and former defence secretary, Liam Fox, to use the Budget to ease the tax burden on businesses. Treasury officials have indicated that Osborne may heed their calls and cut employers' national insurance contributions to boost job creation. There may also be help for small businesses and incentives for start-ups to further stimulate the economy. However, it has also been made clear that Westminster will not borrow any more money to fund an increase in government spending or tax cuts, and that such measures would depend on a tax rise somewhere else or a spending reduction.

Tax increases

An increase of cash to fund tax cuts could come from a number of places. Experts believe that Osborne will use the Budget speech to announce a general crackdown on the avoidance of tax. A popular measure would be to introduce a tax on the purchase of high-value properties held by offshore companies, which have previously escaped stamp duty - a tax worth 1 to 5 per cent of the purchase price of homes over �125,000. Alex Henderson of PwC told the Times that a general increase in the rate of stamp duty on homes above the �1 million threshold is also a possibility. Additionally, it has been suggested that the chancellor may announce the creation of a new top-rate council tax band for owners of homes worth more than �500,000.

In next month's budget, higher-rate tax relief on contributions to pensions is also widely rumoured to be under threat. A concession to the Lib Dems, who are eager to cut overly generous tax-relief for the better off, the proposals would mean that all private pension savers would get tax relief at the basic rate of 20 per cent - with no extra relief for higher rate taxpayers (above 40 per cent). Finally, despite pressure from the City to cut the 50 per cent tax rate on earnings over �150,000, economists say that the chancellor is highly unlikely to remove the income tax bracket, which is unpopular with high earners, until the end of this parliament.