The Pre-Budget Report looks insignificant in macroeconomic terms but may deliver short-term political gains, with measures to gather extra revenues from the private equity industry and non-domiciles used to fund a new low capital gains tax rate of 18% and transferable inheritance tax allowances for couples.

As already leaked, the Treasury has revised down its GDP growth forecast for 2008 from 2.5-3.0% to 2.0-2.5%. This forced the Chancellor to push back projected improvement in the public finances but the current budget still miraculously returns to surplus in 2009-10. Risks remain high though: the forecast depends on an optimistic-looking growth rebound in 2009 as well as adherence to restrictive public spending plans and a further rise in the revenue share of GDP.

The centre-piece of the Report was capital gains tax reform, which is projected to raise £900 million per annum by 2010-11 – the abolition of taper relief enjoyed by private equity firms and other holders of “business assets” more than offsets the cost of lowering the headline rate to 18%. The Chancellor plans to use this cash together with an extra £500 million to be garnered from “non-doms” to fund an effective increase in inheritance tax allowances for couples to £600,000, costed at £1.4 billion by 2010-11.

The capital gains tax changes represent a welcome simplification although there is a risk that some private equity activity will now shift offshore. The main criticism of its Report is its failure to provide a fiscal cushion against unforeseen economic deterioration. With an election delayed until 2009 or 2010, there was a case for tightening fiscal policy now to allow more room for manoeuvre nearer polling day. Politically astute? Time will tell.