Budget 2012 verdict: my pick of the top 9 stand-out issues

by Stephen Tall on March 22, 2012

Here are my personal pick of the top 9 points from this year’s Budget…

1. A definite Lib Dem win on raising the income tax threshold

Raising the income tax threshold — indeed, the biggest ever uplift, to £9,205 — is undoubtedly a big win for the Lib Dems. It’s two months since Nick Clegg made the unusual move of publicly calling on the Coalition to move “further and faster” on taking more of the lowest-paid out of tax, the number one Lib Dem manifesto priority at the last general election. Evidence from the first ‘snap’ budget poll shows 92% public approval for this move, the single most popular measure in the budget.

It’s a personal victory for Nick on two levels. First, he’s won this argument within the Coalition. Secondly, and not to be under-estimated, he’s won this argument within the Lib Dems. Even a few years ago, debate in the party was pretty evenly balanced between those who argued that any spare cash should be ploughed into additional spending on public services, not tax-cuts even for the many. As Jonathan Calder notes here, “The idea of cutting tax for less well paid workers has risen to the top of the Liberal Democrat budget so quickly that it is easy to forget that many activists (and councillors and MPs) joined the party because they wanted to see public spending increase. Much as I support it, I am surprised that the tax-cutting agenda has not been questioned more strongly.”

2. The UK ‘Tycoon tax’ is born

When Nick first raised the issue of the ‘tycoon tax’ — pretty much out-of-the-blue at the party’s spring conference — it seemed to be no more than kite-flying, an apparently off-the-cuff reaction to the disclosure that US Republican Presidential hopeful Mitt Romney pays just 13.9% tax on his earnings. Yet here it is now in black-and-white within the Coalition budget:

… it is unfair that reliefs can be used without limit to reduce tax liabilities, so that some taxpayers with very high incomes have very low tax rates. To curtail this excessive use of reliefs the Government will introduce a limit on all uncapped income tax reliefs. For anyone seeking to claim more than £50,000 of reliefs, a cap will be set at 25 per cent of income. This will increase effective tax rates and help ensure that those with the highest incomes pay a fairer share. (Paras 1.191, 1.192)

3. Cutting the 50p top-tax rate: the top Tory priority

There’s two aspects to the issue of whether to levy a 50% marginal rate of tax on earnings above £150k. First, the economics. Given this tax-rate has only been operational for one year, the evidence on whether it’s worked as envisaged — by raising the cash that was anticipated — is uncertain (as the Treasury itself admits). However, what evidence there is suggests (says the Treasury here) that the effect of the 50% rate is to raise £1bn less than the expected £2.5bn “and that it is quite possible that it could be negative”. Unless you’re wedded to gesture politics, there is little to be gained from being theological on the top-rate of tax: though the government has budgeted for it to bring in less, it is possible thanks to our friend the Laffer Curve, it could yield more.

Secondly, there’s the politics. ‘The signal’ of cutting the taxes for the richest (and those earning more than £150k are the richest) is difficult to message, and it’s clear from the fact that the Treasurey produced a 60-page report specifically on the effects of cutting the 50% rate that George Osborne was acutely conscious of the negative media play such a cut might attract. But as Janan Ganesh notes in The Economist here, fromk a Tory perspective the long-term gain is likely to outweigh the short-term pain:

Only by dealing with 50p now does Mr Osborne prevent it undermining his election campaign in 2015. It will still be a thorn in his side: Labour will invoke the cut as proof of Mr Osborne’s skewed priorities, and the Tory brand will be wounded. But it will not be a dominating issue in the run-up to polling day. And it will not even be a dividing line if, as I suspect, Labour decide against committing to re-introduce the tax band in the next Parliament. Pledging to keep a tax rate which is already there is very different to promising to bring back one that has gone. Seen from this angle, cutting 50p this year looks like the least bad of all plausible options for the government.

For the Lib Dems, of course, the 50p rate is largely a side-show. It is very clearly the main Tory measure in the Budget: it wouldn’t have been a Lib Dem priority, but in Coalition you compromise, and there are many Lib Dem wins which outweigh it.

4. New wealth taxes and the promise of a mansion tax

For the Lib Dems, it is the increase in wealth taxes which help sweeten the pill of cutting the 50% top-rate of income tax: of particular note are this year’s bastardised mansion tax proxies — stamp duty increased to 7% for multi-million pound homes and a new 15% tax on companies buying property over £2m. And a clear sign, too, that the mansion tax may even become reality next year (once London local elections are safely out of the way!):

“In addition, the Government will consult on the introduction of an annual charge on residential properties valued at over £2 million owned by these persons, with the intention of legislating in Finance Bill 2013 for commencement in April 2013.”

5. ‘Granny Tax’: will perception trump reality?

The so-called ‘Granny Tax’ is another issue where the politics and economics divide. Economically the case for aligning personal tax allowance rates regardless of age are clear, simple and straightforward: why discriminate for or against on the basis of age as opposed to financial need? And of course the pension ‘triple lock’ built in by the Lib Dems’ Steve Webb ensures that pensioners’ incomes will continue to rise — indeed, the basic pension is rising by a record £5.30 a week this year, which easily offsets the ‘fiscal drag’ which will see more pensioners paying tax. Bottom line: pensioners will be better off in cash terms as a result of the Coalition’s measures.

However, there is undoubtedly a political problem with the policy, and it’s this: taxing some pensioners more in the same budget as you cut the tax-rates for the highest-earners is a tough sell. And it’s especially tough because newspapers have latched-onto the issue, as this morning’s front pages of the middle-brow press clearly show (which says a lot about the demographics of the ‘dead-tree press’ today). For George Osborne, perhaps distracted by the 50p issue, this is a political embarrassment: the pensioner vote is the one, perhaps above all others, he’s been focused on, and he’s taken his eye off the ball, seemingly taken unawares by the controversy of this measure. The key question now is whether the reality of the Coalition’s generous deal for pensioners, taken in the round, is going to be trumped by the perception that equalising allowances is unfair.

6. Real public spending cuts start from next year

This is a key point, usually neglected amidst the political maelstrom: government austerity measures haven’t yet started. As the Office for Budget Responsibility shows here (Table 1.1, page 17), government spending in real terms (ie, allowing for inflation) has been going up under the Coalition: in 2010, public spending went up by 1.5%, in 2011 by 0.3%, and in 2012 it will go up by 0.5%. Only from next year will overall public spending fall in real terms: in 2013 by -1.1%, in 2014 by -2.1%, in 2015 by -2.8% and in 2-016 by -2.7%. Until now, we have been witnesses to ‘phoney austerity’; next year is when the ‘real austerity’ kicks in.

7. The economic conditions will be ticking-up by 2015

Just a few months ago, all the talk was of a double-dip recession. Barring unforseen events, it’s clear this has now been averted. UK growth is projected to rise 0.8% this year, compared with an overall contraction within the Eurozone. More significantly for the fate of the Coalition and its two parties, the economy looks set to steady itself by the time of 2015, with growth projected to rise 2% in 2013, 2.7% in 2014 and 3% in 2015.

How will this play out in terms of real people’s lives? Well, the rate of unemployment is projected to fall from 8.7% this year to 7.2% by 2015, while average earnings will increase markedly. If the front-line service impact of public spending cuts can be minimised, this is an attractive economic backdrop for the Coalition partners as they prepare for the 2015 general election.

8. Consultation to begin on ending national pay rate

My post at the weekend, Time for the Lib Dems to blow the final whistle on national wage settlements, provoked a significant reader response, mostly against the principle of allowing local pay deals in public services. George Osborne has set out in a letter to the national Pay Review Body here his clear view — with full accompanying evidence here — that pay needs to be made “more market-facing in local areas” prior to a consultation process with each affected government department.

9. UK is still the No.1 tax haven

For all the Lib Dems’ (and Coalition’s) rhetoric against tax-avoiders, one glaring loophole continues to go untouched: our failure to levy UK tax on super-rich non-doms. Here’s how John Lanchester succinctly explains the issue:

Every other civilised country in the world taxes its inhabitants on their income and capital: the basic rule is that if you live in a place, you pay its taxes. But it’s different in the UK. Here, if you come from overseas, and can prove strong links with overseas, and can prove that you are going to return to overseas, and can therefore establish a “domicile” overseas that is different from your “residency” in the UK – well, in that case, you are treated entirely differently for tax purposes. You pay tax on your income in the UK, like the rest of us; and you can remit capital to the UK; but your overseas income, as long as you keep it overseas, is out of the reach of the Inland Revenue.

What this policy amounts to, in practice, is that the UK has a gigantic sign hanging over it saying, “Rich People! Come and Live Here! You Won’t Have to Pay Any Tax!” It is an extraordinary policy for any developed nation, and not one that anyone else has been tempted to adopt. Other countries have low tax rates to attract businesses – in the EU, Ireland and the Netherlands stand out – but the only countries that have anything even vaguely resembling the British policy towards the super-rich are places that are openly accepted as tax havens, such as Monaco and Switzerland. (And even in Switzerland the tax policies vary canton by canton, and are regularly put to the vote.)

This is not just about closing a tax loophole. Super-rich non-doms are now pricing UK taxpaying residents out of (in particular) central London, and in the process adding greatly to the strain on the capital: house prices are articifically inflated, increasing rental costs (and commuting time) for those living there, and further driving up wage demands on employers. This is a massive market distortion, and one the Government should clamp down on.

* Stephen Tall is Co-Editor of Liberal Democrat Voice, and also writes at his own site, The Collected Stephen Tall.