George Osborne, the UK’s Chancellor of the Exchequer, described his Budget on Wednesday as a “Budget for Growth.” The Chancellor also outlined what he said was a simpler, fairer tax system that will benefit everyone and the country at the same time. So, business benefit but so does every household. Great news! Or is it?
Businesses throughout the UK have of course welcomed the news that Corporation Tax is to go down by an extra penny in the pound, from 28% to 26%. Of course that only applies to companies who don’t use large accountancy and law firms or financial services groups that market ‘tax-efficient investments.’ If you add up the plans to bring the Revenue’s take down to 23% by 2014, the Treasury will have very kindly taken £2bn less from companies. This will mean that the UK Government has £2bn less to spend. George Osborne’s argument is that the cut will create more competitive tax rates for business, which he hopes will lead to greater investment and, eventually, more jobs. More jobs means more tax revenue and less people claiming benefit. Whether those jobs are long-term, worthwhile or actually produce something is another matter. To sum up, the Treasury argues that collecting less money will mean they collect more money in the future while giving away less. Everyone at the back understand that? Good. Simple, isn’t it?
Now that I’ve cleared that up, lets look at plans to combine income tax and National Insurance (NI). In the UK, NI is a person’s contribution to an insurance system against illness, unemployment and their old age. Over recent years, NI has provided a more significant part of the UK Government’s revenue, now accounting for approximately 17% of receipts. Everybody in the UK pays NI, albeit some only pay voluntary contributions if their earnings are too low or they aren’t working. Income tax is based on an individual’s earnings – if you earn nothing you don’t pay it. I think that is pretty simple and easy to understand. The UK is not alone in having these different contributions. From memory, most countries in the industrialised world use these dual taxes. Economists and the World Bank think it is the best system to use so that everybody can contribute to their society and needs. So why scrap a system that people agree works and is easy to understand? OK, over the last ten years the UK has not seen a rise in income tax rates but has seen a rise in the NI rates and the scope of it. Combining the two would make such changes more obvious and easier to read at a glance. Or the Treasury and Westminster politicians could talk more honestly about taxation. I know which one of the two I’d rather see – Government Ministers telling us the truth while keeping NI.
Lastly there’s the increased tax allowance that we are all meant to celebrate. If you missed it, your personal tax allowance is to rise to £8,105 in April 2012. So, in twelve months time, the amount you do not pay tax on will increase by £630. A year. I bet you feel richer already for that. To save you reaching for a calculator, in real terms this change is the equivalent of 92 pence a week, or the price of two First Class stamps from next month. Don’t spend it all at once. Of course, given that VAT went up 2.5% at the start of the year, you probably won’t notice the change that much. Likewise with the cut in fuel duty, which went down by 1p per litre after having gone up by an extra 2 & ½ pence in the pound in January. Thanks to George, petrol is now over 1.5p more than it was last year. Another simple cut for us to appreciate. Also, despite what some media reports has said, the Chancellor has not cancelled the fuel duty escalator, he has cancelled it while oil prices remain high. The small print yet again making things less than clear.
Talking of the small print, lets have a quick look at the Office for Budget Responsibility’s accompanying report to the budget. If you’ve not heard of it, the OBR is supposed to provide independent economic forecasts to help in the preparation of the UK budget. They then produce an analysis of the changes. Various people have questioned whether the OBR is able to remain sufficiently independent from politicians and the UK Government. Either way, the OBR has produced a very interesting table setting out the effect of all the policy decisions in the Budget.
- In 2010-1 it is 0.0%.
- In 2011-2 it is 0.0%.
- In 2012-3 it is 0.0%.
- In 2014-4 it is 0.0%.
- In 2014-5 it is 0.0%.
- In 2015-6 it is 0.0%.
So, the Chancellor could have saved us all the trouble and not stood up at the Dispatch Box to set out his plans for the coming financial year. He could have stayed at home, put his feet up and had a nice cuppa. In fact, if he had wanted to help the economy, he could have moved his tax-free trust fund to somewhere it would contribute to UK’s coffers.
The OBR’s report also has two other items that interested me. First there was the borrowing numbers, with it predicting that an £44.5bn extra borrowing was needed over the next six years. In the last four months, the Conservatives and the Liberal Democrats have managed to increase the country’s debt by more than £40,000,000,000. This is due to higher than expected inflation and weaker growth. This slump over the last four months is unique to the UK*, while other countries have seen their economies grow. The Chancellor and his Treasury team would no doubt tell me that without their actions we would face an even worse situation. Just so you don’t forget, their actions to date are cutting public spending, reducing the tax credits people rely on to survive from 01 April and giving big business more tax breaks. Yet again, that’s simple to understand.
The other interesting thing in the OBR report was how they measured inflation. There are two ways to measure inflation – the CPI and the RPI. The CPI is the consumer price index, which measures changes in the price of consumer goods and services households purchase. The Retail Prices Index is a monthly measure of inflation that the Office for National Statistics publishes. This covers the change in the cost of a basket of retail goods and services. I know, they sound like the same thing. The RPI includes items such as mortgage interest rates, buildings insurance, road fund licence and trade union subscriptions. The CPI does not. When mortgage payments change, so does the RPI and inflation. If you start paying higher interest, the CPI stays steady and so does inflation if you choose to use that set of glasses. In fact, various direct tax thresholds will use the CPI as a measure of inflation in future rather than the RPI. At present, CPI is 25% lower than RPI and generally it is. The change to CPI will create a bigger financial hit for most people as it will result in more people paying more tax. That’s because the level of people’s tax-free earnings will increase slower than if they were linked to RPI. Strangely, this complicated change was not mentioned by the Chancellor. I wonder why?
*During this UK slump, the Office for National Statistics has reported that Scottish employment figures rose and the number of unemployed fell. The same report says the opposite happened across the UK. Meanwhile, various reports say that the Scottish economy is recovering, if not even strengthening, following the worldwide recession. Mind you, the Scottish economy always seems to act differently to the rest of the UK.