If Christmas Day had an opposite, it would be Budget Day.
On Christmas Day, a man in a red suit gives you presents. On Budget Day, a man with a red box tries to steal what he can from you.
Perhaps that’s overly cynical. But the fact that we spend so much time fretting and second-guessing the Budget shows how damaging it is. To make plans with confidence, people need stability.
In an ideal world, the Budget would just be a case of the chancellor standing up, saying “everything’s going according to plan”, then sitting back down again.
Instead, we have to worry about what little ‘tweaks’ he might make, both in the speech and in the small print.
So what should you be watching out for?
Plan A is working – but who cares?
The least important part of the Budget is the bit that will probably get the most attention. That’s the outlook for public borrowing.
The chancellor will be able to say that ‘Plan A’ is working. The UK economy has at least avoided a double-dip. And borrowing this year is going to come in under the Office for Budget Responsibility’s estimates. The OBR may even revise up its predictions for economic growth, says the Financial Times this morning.
I say this is the least important part of the Budget, because you can do nothing about it. George Osborne will talk about Labour profligacy. Ed Balls will then stand up and tie himself in knots by trying to blame Tory cuts for the weak recovery, while arguing that Labour would have cut too, but in a nicer way.
It’s all the usual Punch and Judy nonsense. Britain is in a lot of debt. It needs to pay it off, so spending more is not an option. As we’ve discussed here before, the gilts market is being propped up by the largesse of the Bank of England and panicked Europeans.
In terms of trying to get growth ignited, what Britain really needs is radical reform of the tax system and more efficient public services. That’s a long-term project. It’s not going to be dealt with in one Budget. But it’ll be interesting to see if Osborne shows genuine political courage tomorrow, or if he bottles it and favours style over substance.
Will the 50p tax rate stay or go?
Britain’s tax system needs to be made fairer and more efficient. But the best way to do this is to simplify the tax system overall, not add more layers.
I don’t believe that most British people have a particular problem with individuals being wealthy. What is annoying is when you see people with a lot more money than you avoiding taxes that you have to pay, because you can’t afford to invest in particular assets, or to pay for specific tax advice.
Inheritance tax is a classic example; or highly-paid individuals (in the public sector too) setting up as companies in order to cut their income tax. Then there’s the whole issue of houses being bought via companies, thus evading stamp duty. This is a loophole that looks likely to be closed, which is good.
There is nothing wrong with people planning their tax affairs efficiently. As far as I’m concerned, people have a duty to themselves to do so. In fact, my colleague Merryn Somerset Webb has written a handy guide to some of the more common tricks you might be able to take advantage of.
The fault lies with the system that has created these discrepancies in the first place. And that all comes down to governments putting headlines and politics and lobbyists ahead of the good of the economy and the voters.
They come up with all manner of tax-favoured investment schemes to help certain types of small businesses, when what they should really be doing to encourage entrepreneurship is cutting employers’ National Insurance costs and regulations.
By this logic, the 50p income tax rate is just yet another level of complexity and should be scrapped. It probably won’t have raised anything like the money expected, if Britain’s accountants are doing their jobs properly. It’s just yet another make-work scheme for the financial planning industry.
However, that would make for ugly headlines. So I suspect Osborne might make scrapping the 50p tax an aspiration, but not act on it in the current Budget. I hope I’m wrong.
Keep an eye on your pension
The other big announcement the whole financial industry is holding its breath for, is what might happen to tax relief on pensions.
Merryn has already discussed how the key problems with pensions are their complexity, and the government’s propensity to fiddle with them. This just proves her point.
It’s hard to imagine just how damaging the scrapping of higher-rate tax relief would be to the private pensions industry. The key advantage that pensions have over individual savings accounts would be gone in a stroke.
At the same time, the very threat of this happening has been a positive boon to financial advisers and providers. I guarantee you that people around the country are at this very moment posting cheques and topping up Sipps, just in case the tax relief disappears tomorrow.
I’d be surprised if Osborne goes the whole hog. (Although I haven’t got a hotline to the chancellor, so don’t let me stop you posting that cheque if you were planning to top up your pension).
What does seem more likely is that he might cut the annual allowance even further. It’s already been cut from £250,000 to £50,000. He might take it back down to £30,000. He might also tighten up on the rules allowing people to bring forward unused allowances from previous years.
We’ll be publishing analysis of all the big Budget news as it’s announced on the MoneyWeek website tomorrow, so keep an eye out for that. And once the Budget’s out of the way, we’ll be looking in MoneyWeek magazine at what any changes mean for that age-old investing issue: how should you balance your retirement savings between your pension, your Isa – and your mortgage?
• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .
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