UK Budget 2012 - would appreciate feedback/thoughts

[Belgian thought]

Will Osborne's 2012 budget help UK Ltd. come out of the recession?

I was impressed with the push for R&D and science.

But what about the rest?

I hate to say it, coz I have never waved the blue flag, but there seemed to be a lot of common sense.

Would love to hear other thoughts.

BT

 

[Francesca R]

It is fiscally neutral (does not change the net contribution of government spending versus tax) so should not make a big difference to growth. Budget policy will still be an overall subtraction from growth for the next 5 years. The R&D tax credit is pretty trivial. The additional cut in corporate income tax is a slight positive relative to prior plans.

 

[The Don]

As Francesca R mentions, the budget is fiscally neutral (although there is a claim that the drop in top rate tax should increase the tax take from the very wealthy).

Politically however George Osborne may have misjudged things:

• The big winners (from an income tax perspective anyway) are those earning over £150k. I has been estimated that if they paid income tax (a big if), someone earning £1million would be £40k better off. There are increases in other taxes which (allegedly) offset this benefit by a factor of 5
• The big losers (from an income tax persepctive) are pensioners who have had their tax-free allowance frozen (until it falls in line with the standard allowance which was increased considerably). Over time, this will cost pensioners will cost £3bn a year. Older pensioners are hit worse because their allowances are currently higher

So from a headline perspective (which naturally has little to do with the truth) poor pensioners are paying for tax cuts for millionaires - not the headlines George Osborne was looking for.


Oh, and I hate the way politicians spin things. The ConDems are claiming that they have increased pensions by the greatest amount in history. The thing is that this is merely a function of indexing. The pension rises were so high because inflation is high - hardly something to celebrate.

 

[Francesca R]

Probably the government knew that negative media spin on cutting the 50% income tax rate was inevitable, hence the conservatives probably wanted to get that announcement out of the way sooner rather than later, before it started to feel more of a permanent policy and in the hope that the fuss dies down sooner. They have always wanted to get rid of it (and if they didn't then it looks doubtful anyone would).

IIRC there was no claim that cutting it actually boosts income tax revenue, but that the other tax changes (like stamp duty) will claw back more from the rich. Obviously only those rich folks who actually used stamp tax loopholes.

If the latter move brings down property prices where I live I won't be sad, the increases since I bought 12 years ago remains stupid.

 

[Skepticemea]

As Francesca R mentions, the budget is fiscally neutral (although there is a claim that the drop in top rate tax should increase the tax take from the very wealthy).

Ah, yes, the Laffer curve again. I find it difficult to fathom where the incentive is for someone avoiding the 50% tax rate to pay 45% or 40% or whatever. Those able to take advantage of tax efficient schemes will continue to.

 

[richardm]

IIRC there was no claim that cutting it actually boosts income tax revenue

I think there has been a claim; apparently the 50p rate is so punitive that wealthy people have been avoiding paying it in droves. By reducing it to the entirely much more reasonable 45p they'll now happily put their hand in their pocket and pay up.

Apparently. Like Skepticemea I can't see the point of it.

 

[The Don]

IIRC there was no claim that cutting it actually boosts income tax revenue, but that the other tax changes (like stamp duty) will claw back more from the rich. Obviously only those rich folks who actually used stamp tax loopholes.

The claim about increased income tax take was made yesterday by a Conservative MP. She may have been misinformed but claimed that because the top rate was lower, people would be less inclined to avoid paying tax.

My experience is that people who (legally) avoid paying taxes by exploiting loopholes will continue to do so regardless of the marginal rate of tax.

Closing loopholes is a good idea but there's a risk that each attempt to close a loophole creates more, smaller, loopholes

 

[Skepticemea]

Interesting to discover that Mr Osborne isn't a 50% rater payer. Obviously not based on capital.

The 50% rate was going to be cut no matter what. It's why the lead time on the announcement has been 3-4 months. It had to be cut now as the delay in implementation allowed dividends to be pre-paid in 2010. Now that the rate will be cut in 2013, dividends will be deferred until then. If it had been left another year it would have be applied to a real intake.

We'll never know how much tax it could have brought in, but for sure it would have been a lot more than the 1bn quoted (only 1bn, I hear you cry!)

 

[Francesca R]

Here's the relevant bit from Osborne:

Let me tell the House what HMRC say about the difference between 50p and 45p.

Their figures tell the story.

The direct cost is only £100 million a year.

Indeed HMRC calculate the loss of other tax revenues may even cancel that out.

In other words, it raises at most a fraction of what we were told – and may raise nothing at all.

So from April next year, the top rate of tax will be 45p.

http://www.hm-treasury.gov.uk/budget2012_statement.htm

I think (surprise) Osborne is over-egging it, the same way Darling was when he said it would raise £3billion. But Osborne is not saying that income tax will be higher with the rate at 45%. I would disbelieve any MP who says it will.

 

[andyandy]

There was the usual raise money by doing other stuff than raising income tax -

more fuel duty
a big rise in cigarettes
freezing pensioner's tax free allowance
raise stamp duty
(oh and backtracking on child benefit cuts - ie. raising the threshold from £40,000 to £60,000 thanks to a Waily campaign of middle england indignation....)

and all in order to reduce the top rate of tax, reduce corporation tax and reduce everyone's tax (through raising allowance).

That would at first glance appear to be a bit regressive - the biggest beneficiaries are businesses and high earners. The biggest losers are Betty the pensioner, the 20 a day smoker who likes to go for a long sunday drive.....

but it's hardly a radical budget - the tories like to cut taxes and have done....

Far more significant was what was mooted before the budget:

1) freezing salaries of all public sector workers in "low paid" regions - ie big pay cuts for non-Londoners

2) a new review on pensions which will inevitably decide that pension age be linked to life expectancy - and push it up to 70....

 

[andyandy]

Here's the relevant bit from Osborne:

I think (surprise) Osborne is over-egging it, the same way Darling was when he said it would raise £3billion. But Osborne is not saying that income tax will be higher with the rate at 45%. I would disbelieve any MP who says it will.

Is there any independent analysis on what the take has been due to the 50% rate relative to the 40% rate (accounting for the changing economic situation?)

 

[Skepticemea]

Here's the relevant bit from Osborne:

I think (surprise) Osborne is over-egging it, the same way Darling was when he said it would raise £3billion. But Osborne is not saying that income tax will be higher with the rate at 45%. I would disbelieve any MP who says it will.

I believe he's overegging it when he says cutting the rate to 45% will only "cost" £100m.

 

[Francesca R]

The 50% rate was going to be cut no matter what. [ . . . ] We'll never know how much tax it could have brought in, but for sure it would have been a lot more than [it did in the first year] the 1bn quoted

I agree with both of those statements (after my alteration to the second one). The rate was cut because the conservatives think it is too high (and they think 45% is too high as well so I am sure they will try to change it again)

 

[Francesca R]

Is there any independent analysis on what the take has been due to the 50% rate relative to the 40% rate (accounting for the changing economic situation?)

Not much because there was only one full year of data for its operation and the ability of it to distort behaviour is much greater in year 1 than in, say, year 5. So any conclusions should be very vague.

What do you mean by independent? The analysis either has to be paid for by the state (via HMRC, the OBR or the IFS for example) or by private funding (likely to be investment banks or think tanks/lobby groups). Would you trust any of those more than the others?

 

[The Don]

Far more significant was what was mooted before the budget:

1) freezing salaries of all public sector workers in "low paid" regions - ie big pay cuts for non-Londoners

And the effects that the lower pay will have on public sector pensions. [Stereotype]High paid London based civil service mandarins[\Stereotype] will continue to get high salaries which will lead to generous pensions which will allow them to afford to retire to wherever they want (especially low cost areas) whereas the cleaner retiring after 55 years service will do so on a pittance despite the fact that their actual living costs will be driven by fuel and food costs which do not show such a regional disparity.

 

[andyandy]

Not much because there was only one full year of data for its operation and the ability of it to distort behaviour is much greater in year 1 than in, say, year 5. So any conclusions should be very vague.

What do you mean by independent? The analysis either has to be paid for by the state (via HMRC, the OBR or the IFS for example) or by private funding (likely to be investment banks or think tanks/lobby groups). Would you trust any of those more than the others?

Well, I'd trust IFS more than MPs or a left wing/right wing lobby think tank. So, have the IFS looked at the issue?

 

[Darat]

...snip...

2) a new review on pensions which will inevitably decide that pension age be linked to life expectancy - and push it up to 70....

I think the issue with tweaking the state pension/retirement age is the uncertainty it helps generates, I would prefer the government to say something like "OK anyone under 45 today it's 70" and be done with it. I picked 45 because that still leaves someone of that age today 25 "working" years to sort out their pension.

 

[Darat]

And the effects that the lower pay will have on public sector pensions. [Stereotype]High paid London based civil service mandarins[\Stereotype] will continue to get high salaries which will lead to generous pensions which will allow them to afford to retire to wherever they want (especially low cost areas) whereas the cleaner retiring after 55 years service will do so on a pittance despite the fact that their actual living costs will be driven by fuel and food costs which do not show such a regional disparity.

And especially because it will now be a pension paid on average salary, not final salary.

 

[Darat]

Well, I'd trust IFS more than MPs or a left wing/right wing lobby think tank. So, have the IFS looked at the issue?

Yep: http://www.ifs.org.uk/budgets/gb2012/12chap9.pdf

 

[Francesca R]

have the IFS looked at the issue?

It says it's too soon to make a decent evaluation of the money it raises or doesn't raise.

The earlier Mirrlees Review of UK tax (also through the IFS) pointed to an optimal top income tax rate of 40% (to which NICs are added) page 109, which implies that 50% raises less than 40%. Also this note (page 11) using the same analysis says that the 45% rate (which was what the 50% rate was originally going to be) "could raise approximately nothing". Both the latter two were written before any data was available and they both highlight large uncertainty.