Wednesday 21 March 2012

The Budget

I thought I'd make a late night comment on the budget which has just come out today. Whilst every detail remains unknown to me, there is enough for me to make a comment on:

1. The reduction of the 50p tax rate to 45p.

This is probably the most contested part of the budget, not that any of it was left unexamined by Labour, and for good reason. There is sound argument on both sides here - tax people more and they'll work harder to find ways of legally/illegally avoiding tax/ move out of the country entirely and take their profits elsewhere. However, how can you justify reducing taxes on the richest at a time when the poorest are paying so heavily for the mistakes of the former government? Surely tax breaks for rich people isn't going to help us get out of this recession and plug the gap in government spending and tax revenue.

I lean towards the former argument - I do believe in incentivising high earners to earn more money and thus pay more tax. Forcing them to pay more in tax only incetivises the opposite. However, does that really apply in this case? Osbourne, although he is always going to say this, claims that the higher tax rate isn't bringing in any extra revenue which is fair enough, but does lowering 5p actually mean that people are going to suddenly stop avoiding this higher rate of tax? The only reason to lower the tax rate is if it will actually bring in more revenue (through the reasoning above) and there is no way that a 5p decrease in the tax rate will do this. Osbourne has bottled a big decision here - he could have abolished this rate of tax entirely and brought it back down to 40%, a huge move, that may have had a positive effect on revenues but decided for a pathetic middle ground that does nothing except attempt to appease the Conservatives' rich allies whilst monumentally piss off everyone who hate bankers. Which is everyone.There is weight, in my opinion, to the argument for lower taxes (if not at a time of austerity necessarily) but this is going to make no difference and smacks of protecting bankers for no reason.

I thought it best to add in a bit in response to the comment below regarding the 0.105% increase in the bank levy designed to stop bankers from gaining benefit from the reduction in tax. First of all, as I asked below, does 0.105% actually offset a 5% reduction? That is equivalent to giving 5p and taking back 0.105p in the pound - for anyone who couldn't do the maths, I cannot see how that really harms the bankers. However, more crucially, would you not agree that it is pointless to lower a tax and then raise another tax to ensure people don't benefit excessively from the new lower tax - 1. That seems to defeat the purpose of lowering the tax initially and 2. It seems to be admitting that bankers will/would have benefited from this lower tax as a (tiny) measure has been put in place to stop this. What a stupid move! 

It is about time, whilst we are on the tax point, that the government did more to prevent rich earners avoiding tax legally (or indeed illegally as the case my be). Here lies the real issue - big companies can afford to spend big money on avoiding tax and will continue to do so even with lower rates; why not deal with this problem effectively?

2. The child benefit caps.

This seems completely the right move in my opinion. You may be able to argue over the lower end figure for removing the benefit, but does someone earning hundreds of thousands of pounds a year really need child benefit? More importantly, does it, in this situation, even benefit the child? Surely that should be the cut off point - where the child benefit is of no benefit to the child, where it makes no difference the standard of living of the child why should to be given to the parents? That's quite a simple argument, but I'm open to reasons why it's wrong.

3. The Pasty Tax

It has, since the writing of this blog, been brought to my attention that the "correction of VAT loopholes" that the BBC write about in their article, to be found on the BBC website, is actually, effectively, a pasty tax. I've tried to detach myself from emotional involvement on this and while one can consider the large negative impact this will have on the Cornish economy especially, it is the principle of this that irks me too. Needless to say there are economic arguments for and against the move, and I do lean towards the against side, but taxing something so British seems anti-British. Was it not the Conservatives who opposed the proposed Cider Tax that Gordon Brown proposed and dropped
The good in question

There are some other, more minor, changes:

4. Corporation tax has gone down - probably just about a good move, should help businesses and incentivise investment which can only be a good thing. We await the empirical evidence I suppose

5. New Stamp Duty rate for homes over 2million - can't see a problem here really. Seems the right move

6. Tobacco Duty Rises - As a non-smoker and a complete anti-smoker I can't see any problem here either. If you wish to kill yourself then at least give money to the government doing it!

7. Fuel Duty rise - will, due to price in-elasticity of demand of fuel, probably raise revenue. There is a strong argument for fuel already being to expensive and this may inhibit ease of travel and thus growth.

8. Increase in personal tax allowances to £9,205 - again this seems a good move, or at least a move that doesn't simply favour the rich and could boost consumption amongst those most likely to spend their income - the poorest, who will now be better off. 

Overall, I remain unconvinced. Sure this budget does some good things - the child benefit removal and increase in personal allowance but you cannot help but feel that the biggest change made; the change that headlines the BBC website and will be most focused on, has been horribly fudged up. I can't understand why he has made this move now - it will almost certainly not bring in extra revenue and can only serve to annoy those opposed to rich people getting richer at a time of need for most. It is at least a political mistake and time will probably show it to be an economic one too. 


  1. Perhaps you will not have read that the Chancellor also announced a 0.105% increase to the bank levy to offset any potential benefit to bankers from the elimination of the 50p tax rate; he has planned ahead for the torrent of abuse he would otherwise been vulnerable to.

  2. You would be correct - however, in light of that new information, I ask you this: "Does a 0.105% increase in tax really offset a 5% reduction?"

  3. I have also, for the record, responded in more detail above if you are interested.

  4. Glad to see the Pasty Tax getting the coverage it deserves!

  5. Cornwall fiscally, gets a very raw deal indeed. Only receiving back a half of the tax it pays into the pot. Precious little government support, road building or services. Politicians quite like holidaying there, primarily because it is so old-fashioned (by necessity).

    1. Seeing as I do not contest any of what you say, I shall concentrate on "raw deal" and hope it was a pun on the tax being on "hot" pasties?


Please refrain from abusive comments.