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

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 editor of the 2013 publication, The Coalition and Beyond: Liberal Reforms for the Decade Ahead. He is also a Research Associate for the liberal think-tank CentreForum and writes at his own site, The Collected Stephen Tall.

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28 Comments

  • #11 – commitment to introduce single tier pension reform with a White Paper this Spring. This is a big win for Steve Webb who was personally praised for his work on state pensions by the Chancellor.

  • #9 – Stephen, this is not just an issue for London but for many other parts of the UK including your home town of Oxford.

  • Nick (not Clegg) 22nd Mar '12 - 4:58pm

    The Chancellor (and the Quad?) was inept to be taken by surprise by the press reaction to the “Granny Tax”. Everything else having been leaked in advance, it was the only piece of news in his speech yesterday, so why wouldn’t the press lead on it?

  • “For the Lib Dems, of course, the 50p rate is largely a side-show.”
    You may well be in for a shock on election day if this is your attitude. Many people won’t accept the argument that ‘this belonged to the Tories’ as people will, rightly in my opinion, point out that this party is the one that facilitates the Tories to enable them to undertake such measures. I’d also avoid suggesting to the ‘squeezed middle’ voters that they are merely ‘wedded to gesture politics’. There appears to be a recurring theme on this site that the voters just don’t understand … I thought liberalism was all about trusting the people’s judgement not patronising them. Its no good trying to make an apparently evidence based argument on something that you yourself acknowldge lacks conclusive evidence. ‘evidence so far suggests…’ is unconvincing – the flip side could be ‘clever accountancy by those anticpating the 50p rate means that many avoided it for the first year and thus the evidence is incomplete.’

    ‘phoney austerity’; next year is when the ‘real austerity’ kicks in.
    Again good luck with telling people that thus far they haven’t really been suffering from austerity measures. I have family and friends who have been made redundant and I myself have have endured years of pay freezes. You may wish to find another phrase for ‘phoney austerity’. The cuts themselves may not have kicked in massively but preparing for them has had a huge impact on many people’s lives already. eg. people being made redundant now in preparation for cuts coming in the next financial year.

  • “Many people won’t accept the argument that ‘this belonged to the Tories’ as people will, rightly in my opinion, point out that this party is the one that facilitates the Tories to enable them to undertake such measures.”

    Your opinion is wrong.

    The above statement wholly fails to grasp the nature of coalition politics. This is understandable, though regretable, in an electorate unused to coalition – and requires time and experience for people to gain that understanding. For one such as yourself who, clearly, takes an interest in politics, it indicates wilful misrepresentation.

  • @Tabman

    Or equally I’m afraid the electorate, having heard the party say a lot of things pre-election, and seen it support and enable policy that wasn’t even in the coalition agreement, quite frankly can’t wait for the time to get back at us with the experience they are having…

  • LondonLiberal 22nd Mar '12 - 5:37pm

    Tabman, i don’t think that simon’s argument is wrong. The nature of coalitions is that each party enables the other to do what it couldn’t otherwise have done for lack of popular support. I as a former lifelong libdem think that we have enabled the tories to be almost as bad as they would otherwise have been, and that coalition, whilst a sensible option at the time (in my view) has turned out to be a horrendous mistake.

  • @tabman
    “Your opinion is wrong”
    Serves to prove my assertion that there is an arrogant we know better attitude that pervades the party at the moment. The whole notion of opinion is that it is an interpretation. The logic follows that any opinion contrary to yours is therefore by definition wrong. The point i made is that the public won’t just roll over and accept such moves as being the exclusive responsibility of the conservatives. As a person with a well known association with the Lib Dems i hear this over and over. I heard it today from intelligent and politically literate friends and colleagues. Of course they can probably just be dismissed as wrong too… That doesn’t however make for a very successful campaign strategy.

    As to not understanding coalition politics. Perhaps it is you who needs a rethink. Divying up ‘your policy ‘ and ‘our policy’ doesn’t wash. You’re in it together. I fully understand how coalition works and consequently chose to argue, here and elsewhere, that the party shouldn’t enter coalition with the Tories because for every gain the party would facilitate Tory policies that run contrary to many things we’ve argued for and campaigned on for many many years.

  • @orangepan

    Haha Touche. I accept the point you make and acknowledge i was stung by the blithe ‘you’re wrong dismissal. Having said that i would point out that this assertion is not based on this statement alone. I’ve made this point before. As a critical friend of the party i’ve lost count of the number of times debate has descended to accusations of tribalism, trolling and not understanding. Many are capable of engaging in debate but sadly there are a largenumber who aren’t.

  • P.s orangepan i’m not claiming to know better i’m just offering a different opinion, an opinion that implore people to listen to – not because its necessarily better but because it is a view shared by many of our erstwhile supporters. People don’t have to agree but at least give it consideration.

  • David Evans 22nd Mar '12 - 6:42pm

    #6 Of course big cuts have been taking place in Local Government since day 1. In addition, some particularly nasty Central Government cuts are being given to Local Government to implement under the guise of “Localism”

  • @orangepan
    Thank you i appreciate your Liberal commitment to debate. I’m not categorically claiming my opinions to be superior but instead encouraging pluralism and counselling others to try and understand the views of critical friends because such views will need to be addressed if the party is to regain erstwhile supporters. I’m happ to be disagreed with.

    As to my points being contradictory. My original two points were that
    1. I don’t believe that many voters will distinguish between the coalition partners whennit comes to judging government decisions and actions.
    2. The notion that we are in a time of phoney austerity seems to be based on the economic fact that cuts are yet to bite. Services and peoples jobs have been cut on the basis of imminent cuts thus there are many who pay the price of austerity regardless of if the balance books indicate austerity hasn’t kicked in yet.
    I don’t believe that is contradictory.

  • I think you’re wrong on 4, Stephen.

    “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.”

    The “persons” referred to are “non-natural persons, such as companies.”

    This was a very disappointing budget for those who want property taxes.

  • Stuart Mitchell 22nd Mar '12 - 7:49pm

    #1 Yourself (and Jonathan Calder) are wrong to think that the government has been lavishing “spare cash” on a “tax cutting agenda”.

    As anybody who has bothered to look at the government’s own impact analysis knows (e.g. chart B:1 in http://cdn.hm-treasury.gov.uk/budget2012_complete.pdf), every single income decile has had their overall taxes increased by this government. Which is of course perfectly understandable… but why can’t the Lib Dems at least be honest about what is going on, instead of telling people that one tax “cut” somehow cancels out several other much more significant tax increases?

    If you broke in to my house, took £500, then left me a “gift” of £200, would you expect me to praise you for your generosity? That is, in effect, what Lib Dems are asking of the electorate.

    It’s very interesting to compare the chart I just referred to with the equivalent chart (A:2 in http://cdn.hm-treasury.gov.uk/2011budget_complete.pdf) from last year’s budget. Danny Alexander has certainly made good on his promise to help the “squeezed middle”. In LAST year’s chart, people in the lowest two deciles weren’t doing that badly, with each decile further up from that taking a progressively bigger hit. Which seemed fair enough. But in THIS year’s chart, for some reason it’s the suckers in the second lowest decile who are taking the biggest hit (apart from – supposedly – the very top decile); then as people get more wealthy, they take a progressively smaller hit, with those in the sixth, seventh and eight deciles taking the smallest hits of all.

    The government is basically abandoning the people in the lowest third and desperately trying to win back favour with those in the middle. I wonder why?

  • Tabman. You are expressing a reoccurring line of thought on this site (as others have pointed) namely, that the voters just don’t understand. That is, politically, a very dangerous position to take. For three elections (including 1997) in a row the Conservatives took this view, and thus consoled themselves that it was merely the ignorance lack of understanding of the voters that kept them out of power. In fact voters, in my experience, are incredibly canny, and almost always see through political spin and rhetoric. I believe there is a strong feeling building (not least in the Liberal Democrat party) that our Leader/Rulers are not listening to the electorate.

  • My blog post on the tycoon tax is here: potential but with some real oddities: http://centreforumblog.wordpress.com/2012/03/22/budget-2012-reaction-tycoon-tax-anomalies-tim-leunig/

    My op-ed in tomorrow’s FT on why we should assault unjustifiable age specific tax loopholes (aka granny tax): http://www.ft.com/cms/s/0/d49cd624-7414-11e1-bcec-00144feab49a.html#axzz1pt1OV44m (free, although you may need to register.)

  • Liberal Neil 22nd Mar '12 - 10:40pm

    Two points:

    1 While dropping it wouldn’t necessarily be our priority at this point, having a 50p higher rate of tax isn’t Lib Dem policy. Several of the things replacing it are Lib Dem policy;

    2 The freeze in the age realted allowance doesn’t happen until next year. This year the age related allowance is going up (by £560 for 65-74 year olds and by £670 (I think) for over 74s), and that follows a £450 rise last year. That means that pensioners with income above the allowance level are already £200 a year better off, on top of two good pension rises. Pensioners will pay less tax on their income in every year of this Parliament than they did under Labour.

  • What about the abandonment of the deficit reduction strategy? Borrowing is forecast to double compared to the plan set out in 2010. Remember the rhetoric “You can’t fix a debt problem by borrowing more”. No longer a slogan the Coalition can use.

  • Roger Roberts 23rd Mar '12 - 9:45am

    The basic rise in personal allowances is good however the IFS says today that it is far ro early to say if the taxes on the wealthy like the mansion tax will actually bring in what is forecast.
    Ifit does not and people perceive that the rich have got away with it again we will be left holding the baby while the Tories blame us for the budget fiasco

  • Godfrey “Tabman. You are expressing a reoccurring line of thought on this site (as others have pointed) namely, that the voters just don’t understand. That is, politically, a very dangerous position to take. For three elections (including 1997) in a row the Conservatives took this view, and thus consoled themselves that it was merely the ignorance lack of understanding of the voters that kept them out of power. In fact voters, in my experience, are incredibly canny, and almost always see through political spin and rhetoric. I believe there is a strong feeling building (not least in the Liberal Democrat party) that our Leader/Rulers are not listening to the electorate.”

    I’m not expressing the opinion that “the voters are wrong”. I’m expressing the opinion that the British political system and all its adjuncts is conditioned to view politics through the prism of two adversarial positions. “If you’re not for me you’re against me”; “Betrayal!” etc etc ad infinitum, ad nauseum.

    The truth is that politics, and especially coalition politics, is far more nuanced than that simplistic portrayal. Inevitably it will take time for the electorate to get used to the proposition that parties join together and do not get all of what they want and end up having to pass legislation that they would not have had they been governing on their own. This is not betrayal; it is the reality of coalition politics. The hysteria in the media (and in the wilder parts of this site) reinforces the binary message. It is only through time and exposure that all the nuances will start to seep into the margins of this long-pervasive misperception.

  • TP – “Rather, “Every civilised country in the world” taxes its residents either where the money is earned or where the earner lives, and tax treaties exist to ensure that, where two systems do not align, the taxpayer does not get taxed twice. The reason that non-doms don’t pay tax on money earned in foreign countries is because they are being taxed in the foreign country. To tax them again because they live here would be pernicious, and would undermine the free flow of people and capital which is part of a liberal international economic order.”

    It’s a long time since I studied tax, but ISTR a rule that if tax rates were lower in a foreign jurisdiction than UK rates, the balance between the tax paid oversees and the tax payable had that income been earned in the UK was payable in the UK?

    Or is that the difference between residence and domicile?

  • OranjepanMar 22 – 4:03 pm……#10 Tax simplification………….

    Does your thinking embrace the ‘Child Allowance’ changes?

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