29 November 1996

High-flying £could dissipate Budget boons

By Philip Clarke

and Tim Relf

ANY benefits to farmers from this weeks Budget are likely to be short-lived due to its impact on currency markets.

With more cash in consumers pockets due to tax cuts, the expectation is that Chancellor Kenneth Clarke will have to raise interest rates soon to control inflation.

The consequence of this – apart from the extra cost of servicing farm debt – will be to give sterling another boost, leading to cheaper food imports and less competitive exports.

The £ has already firmed in response to the Budget signals. As FW went to Press on Wednesday (Nov 27) it was almost at a three-year high against the deutschmark at 2.5582. More significantly, it was also more than 6% higher than the current green rate, which could trigger another revaluation, cutting support prices for barley, beef and butter.

This will not take place until Jan 21, 1997, and could be avoided if sterling weakens before then.

The good news for farmers is that, if it is triggered, it will be deemed an "appreciable" revaluation by Brussels. In this case, arable area aids and set-aside payments would be maintained at this years level until 1999.

There is also the possibility of compensation for any income loss arising from lower commodity prices.

The dangers of a surge in currency were picked up by panelists at this weeks special FARMERS WEEKLY Budget Forum at the Royal Smithfield Show.

"What affects farmers will be what happens to interest rates. If they rise, and there is a revaluation, commodity prices will continue to slide," said Christopher Monk of land agents Strutt and Parker.

Of more immediate impact will be the rise in fuel prices and road tax. "These will cost farmers an additional 50p/acre," said Vincent Hedley Lewis of accountant Deloitte and Touche.

On the plus side, he added, there was still a "window of opportunity" for farmers to take advantage of the current capital gains tax reliefs available. They could also benefit from the fact Customs and Excise is now only able to claim underpaid tax dating back for three, rather than six, years.

David Bolton of business consultants Andersons said the Budget was good for the general economy but less good for agriculture. "Taxes on profit are a bit softer – but it will be harder to make the profits in the first place.

"The chancellor also missed an opportunity to make the tax allowances on farm buildings more favourable. If these had been changed to 10% over 10 years, rather than keeping them at 4% over 25 years, this would have increased investment and helped farmings long-term viability."

&#8226 For more Budget information, see page 22.

On the case…Chancellor Kenneth Clarke revealed a neutral Budget on Tuesday, with limited tax cuts and "eye-wateringly tight spending plans".