Rhona Irving: A simpler tax system would be the best giveaway from Darling

WITH the general election hot on the heels of the Budget, Alistair Darling would surely love to be able to paint a rosy picture of the UK's position and produce some pre-election treats.

However, as he takes to the dispatch box on Wednesday, only one thing is certain, the UK's economy is facing a significant, steep uphill climb.

The combination of the recessionary decline in tax revenues, the rising cost of servicing public debt and concerns over the sustainability of the recovery leaves the Chancellor with the unenviable challenge of delivering a popular Budget when the cupboard is bare.

There has been an increasing focus in recent months on the fiscal gap. To put the size of this hole in public finances into perspective, PricewaterhouseCoopers' latest UK Economic Outlook report suggests that, taking a cautious view of GDP growth, a 20 billion package of tax rises and spending cuts above and beyond those already planned would be needed over the period to 2013-14 to plug the gap.

Investors, who seem to have given the UK the benefit of the doubt over sovereign debt levels in the run-up to the election, now need the government to set out the UK's balance sheet and provide a clear route map to addressing the budget deficit.

While there seems to be a consensus across the political divide that the gap needs to be plugged, there are different views on when to do so and what blend of tax rises and spending cuts is required.

All of this makes a pre-election giveaway Budget highly unlikely and doesn't leave the Chancellor with a great deal of room for manoeuvre. As a result, we don't expect any headline-grabbing announcements, but rather a holding Budget in recognition of the upcoming election.

The Chancellor should remind us of the previously announced tax rises that will come into effect from 6 April this year (the 50 per cent income tax band, withdrawal of personal allowance and restriction in pension relief for higher earners) and next year (additional 1 per cent National Insurance contribution, NIC, for employers and employees). Such taxes on employment income currently account for more than half of the overall tax take and, while this could be a target for future tax rises, is does pose the question as to how much more the man on the street could bear.

There is continued speculation that the Chancellor could increase the capital gains tax rate from 18 per cent (or 10 per cent on the first 1 million of gains qualifying for entrepreneur's relief) to reduce the disparity between the CGT rate and the new top rate of income tax. This will be of particular concern to entrepreneurs, who would see the post-tax value of their investments reduce if this change were to be implemented, but would also be of wider concern as it would further weaken UK competitiveness.

On a more positive note, our largest political parties are also considering new measures that could help to promote growth. The Chancellor has already announced consideration of a UK patent box to encourage business to develop and retain its intellectual property in the UK, rather than looking to other countries where tax rates are lower. The Conservatives have raised the possibility of NIC relief for new jobs, which would make it cheaper for business to take on new employees,

The Conservatives have also raised the possibility of cutting the main rate of corporation tax, which would be welcomed by many businesses. The current thinking, however, is that this could be funded by a restriction in capital allowances, which would mean some capital-intensive businesses would actually pay more in corporation tax in the short term. It remains to be seen whether and to what extent the Chancellor might adopt a similar approach.

Although we can't reasonably expect a great giveaway, the Chancellor would at least send out the right messages if he were to be more positive in setting out his strategies to tackle the deficit, and by doing more to make the UK a more attractive fiscal regime in which to do business. The UK tax system is regarded as being overly complex, and signalling a move towards modernisation and simplification would be an important step in the right direction that would help to rebuild confidence at a critical time.

Focusing on these areas would do more for taxpayers and the economy than a headline-grabbing giveaway.

Rhona Irving is head of tax Scotland at PricewaterhouseCoopers