Pointless, symbolic changes to income tax. Micro-management of benefits. Raids on pensioners.
It’s like Gordon Brown never went away. Budget 2012 felt a lot like a Brown budget to me.
Chancellor George Osborne probably feels he navigated a deft line between the hand-wringing whining of his Lib Dem colleagues and the indignant sputtering of the Tory right wing. I suspect he probably just irritated everyone equally.
But who cares what they think? What does it mean for you?
The outlook for the British economy is still uninspiring
George Osborne’s Budget does very little to change the outlook for the British economy. Overall, the budget was basically ‘fiscally neutral’. That means for every giveaway, there was a takeaway to pay for it.
The Office for Budget Responsibility, our new fiscal watchdog, hasn’t done much to change its forecasts. The best that can be said – though this shouldn’t be underestimated – is that things didn’t get any worse. Britain will avoid a technical recession, but it won’t see a rip-roaring recovery in the near future either.
Though as my colleague Matthew Partridge noted yesterday, this could be overly optimistic. Anything from more chaos in Europe, to an oil-fuelled surge in inflation, could knock us off track.
That’s nothing new, of course. But it doesn’t suddenly make me want to rush out and buy British government debt, even although yields have ticked up in recent weeks.
What about the ‘open for business’ factor? Well, as my colleague Phil Oakley noted yesterday, investors should be pleased about the corporation tax cut. Lower corporation tax should mean higher profits being paid out to shareholders. And presumably it also means that any companies that were thinking of upping sticks and leaving will reconsider it.
But the reduction in the 50p income tax to 45p was disappointing. Not because I think we should have a 50p top rate of tax. But I do think you should either stick with it, or ditch it altogether, not end up with this pathetic fudge in the middle. If the 50p rate did indeed encourage too many avoidance measures, then I fail to see how reducing it to 45p is going to make anyone change their mind and cough up. And it also means that we still have three rates of income tax, instead of two.
Irritating, pointless tinkering
This is one of the most irritating aspects of the Budget in general. The Conservatives keep prattling on about tax simplification, but every time Osborne stands up, he makes things more complicated.
The mess they’ve made of child benefit is a classic example. It really is worthy of Gordon Brown at his most control-freakish. Child benefit was simple. Everyone with kids got it. End of story.
You may not like the fact that rich people get hand outs like child benefit or the state pension. But you also have to remember that creating elaborate systems to make sure that only the ‘deserving’ get hand outs costs money.
However, it’s all about public appearances, not practicalities. So at first, the government decided to means test child benefit above a certain level. But then lots of people complained that they were squeezing the ‘hard-pressed’ middle classes.
So now we have a system where only those earning more than £50,000 a year will have to sacrifice their child benefit. And even above that level, the benefit will taper off, to avoid a ‘cliff edge’ where you could get a pay rise from your employer, and actually be worse off because you lost the benefit.
This is Osborne’s idea of making things simpler? Creating a load of extra marginal tax rates? Just scrap it altogether or leave it well alone.
The big pensions ‘grab’
Meanwhile, in the interests of ‘simplifying’ the pensions system, Osborne pulled a pretty sneaky manoeuvre. The personal allowance – the amount you can earn before you pay income tax – is going up to £9,205 for everyone else. But the personal allowance for pensioners (at £10,500, or £10,650 for the over-75s) is being frozen.
The idea is that eventually there will be just a single personal allowance. This makes sense. But it seems pretty hard on pensioners, who are going to lose out in real terms – having the rate frozen means that inflation will take an added toll on their incomes every year.
Paul Johnson of the Institute of Fiscal Studies argues that pensioners have escaped lightly from austerity measures so far. “Given the scale of the reductions to household incomes created by welfare cuts and tax rises, it is perhaps surprising that this is the first tax change specifically targeted on pensioners”, he tells the Financial Times.
However, this rather ignores the fact that recent pensioners have borne the brunt of probably the biggest economic distortion of the last four years – the collapse in gilt yields and rise in inflation, driven by quantitative easing.
The good news however, is that the chancellor didn’t touch tax relief on pension contributions. And we should be thankful for small mercies. Because it looks as though anyone who wants a decent standard of living when they retire is going to have to save harder than ever. We’ll be looking at the best way to do so in the next issue of MoneyWeek magazine, out next Friday (if you would like to become a subscriber, get your subscribe to MoneyWeek magazine).
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