Liberal Reform response to Budget 2014

Liberal ReformLiberal Reform had this to say about the measures contained in yesterday’s budget:

Liberal Reform welcomes much of this year’s budget, which once again has a clear Liberal Democrat thread running through it. From income tax to pensions, the changes announced by the chancellor come from Lib Dem thinking.

There is one area where we would liked to have seen further progress, and that is on housing. We have been critical of the Help to Buy scheme and maintain that it is the wrong way to tackle a problem that is primarily one of supply. The new “garden city” is welcome, but it must be seen as a starting and not a finishing point.

Below are some thoughts on individual measures announced.

Personal allowance to £10,500

This remains a very welcome policy, a key element of a fairer tax system, and increasing incentives to work. Previous governments focussed on the basic rate of income tax which is much less progressive, and it is a real win to change the terms of the debate. We would also like to see progress on increasing the national insurance personal allowance, which would be of benefit to more people on low incomes.

Good news on the economy

Unemployment is down, including youth and long term unemployment. UK growth is the highest of advanced major economies. Income inequality is at its lowest level for 28 years, lower than at any time under the last Labour government. Wages are now expected to rise faster than inflation. The deficit is forecast to fall faster than previously expected. Only a year ago people were saying that the coalition’s economic strategy had failed: they can no longer say the same today.

Pensions reforms

Trusting pensioners with their pension pot is a good liberal idea. Annuities are very bad value for money at the moment – not least because of the elements of default and compulsion – and the present arrangements for income drawdown are subject to complex rules and fees. We once again pay tribute to pensions minister Steve Webb, who has set an excellent example of how to succeed in a coalition: achieving successes in his brief and developing a good working relationship with Iain Duncan Smith.

Capital allowances

Business investment must continue to increase if the economic recovery is to become entrenched and sustained. Increasing the investment allowance to £500,000 is very welcome and will mean that many small businesses will have a full exemption. This was first championed by Lib Dem MP Gordon Birtwistle and the Lib Dem Campaign for Manufacturing, and we congratulate them on their success.

Labour’s vacuity

Labour has nothing to say. They complain about a cost of living problem that is due to the recession and the austerity that necessarily followed it. They struggle to maintain a position on that austerity: Miliband yesterday was complaining bitterly about it, but on other days they promise to keep it. Yesterday they were specifically complaining about tax rises that they also promise to keep and add to. On borrowing they have long demanded both more and less borrowing at the same time.

Tax avoidance

The coalition has focussed unprecedented resources on tax avoidance, and this year’s budget goes further still. It is quite right that particularly at a time of fiscal tightening artificial avoidance schemes should be closed.

Social security

Some of the coalition’s most difficult decisions have been in the area of welfare. Liberal Democrats should not set their faces against welfare reform: there is nothing liberal about a system that traps people in dependency on Whitehall bureaucrats. However, given the better-than-expected economic news, there was scope for the government to look back on some of its changes. For example, while we support the under-occupancy charge generally, we think the DWP should look at disapplying it for those who are willing to move but cannot be rehomed because of a housing shortage: that is not their fault, and they ought not to be penalised.

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27 Comments

  • Edward Reach 20th Mar '14 - 12:19pm

    Good to see a measured response to the Budget from Liberal Reform. Having secured the Lib Dem commitment to increase the PA to £10k it’s also absolutely right to highlight the importance of increasing the NI allowance to help the lowest paid. Also right to highlight the vacuous response from Labour, in fact it would have been nice if Ed M had actually referred to the Budget in his…umm, Budget response.

  • Edward Reach
    Can you provide a link to the measured response you make reference to ?
    Or are you describing the words above?
    How are the six sentences attacking Labour a “measured response to the budget? Are they not just schoolboy taunts by people who cannot think of anything else to say?
    The rest of the words above are rather bland and uninformative. What is it that makes this repose identifiable s coming from ‘Liberal Reform’ rather than any other party loyalist scratching around to say something positive?

  • Eddie Sammon 20th Mar '14 - 1:07pm

    I would call capital allowances “mercantilist”, rather than liberal. The same goes for apprenticeships. Both should still be cheered, but they are “satisfactory” rather than “optimal” policies.

  • Edward Reach 20th Mar '14 - 1:21pm

    Hi John, thanks for your reply. It was Labour’s response to the budget that was ‘bland and uninformative’. I don’t think there is anything wrong with calling them out for that as part of an overall analysis. I can’t pretend to have an encyclopaedic knowledge of the views of party loyalists in comparison to Liberal Reform, but having read a fair bit of what they have to say, I think they are making a positive contribution to the debates that inform party policy. Best wishes.

  • Is anyone else uncomfortable about the £15,000 tax free ISA allowance? Who in the current economic climate can afford to save £15,000 every year? Maybe a solution would be to have maximum lifetime amount as we do with pensions..

  • Eddie Sammon 20th Mar '14 - 2:34pm

    Gareth I agree with you on ISAs, it was just not at the top of my list of complaints. My list is fairly small though.

  • @gareth wilson
    Good point. Yes I am.
    I was pleased to hear about good news for ‘savers’ when I saw the headlines but don’t consider this to be good news just merely irrelevant news to me and I imagine the majority of ‘hard working’ savers.
    I am not able to link to the source but an economist on radio 5 yesterday stated that on average British families currently save approximately 5% of income (which is down from 7% in recent years). By this reckoning the beneficiaries of the ISA threshold increase are those with an income of approximately £200-£300k pa. I’m sure there are exception but on the whole i wouldn’t particularly say they constitute the most needy of groups!

  • Edward Reach 20th Mar '14 - 3:43pm

    @Simon, I think you’re right in relation to people saving regularly from their income. However, there will be lots of people (older, more likely to vote!) who have accumulated lump sums over many years in savings accounts with low interest rates and tax deducted from the interest. Those people will be able to transfer large chunks of those savings to utilise the full new ISA allowance immediately and in subsequent years to benefit from tax free interest at a level previously unavailable within that wrapper. Many of those people won’t be earning anything like 200k-300k.

  • This freeing up of ‘the pension pot’, appears a good idea on the surface, but what needs to be clarified is whether someone of age 55+ who loses their job, is denied means tested benefits because they are considered to have ‘savings’, which a few days ago was considered to be an inaccessible pension pot?

  • Chris Manners 20th Mar '14 - 5:09pm

    “This remains a very welcome policy, a key element of a fairer tax system, and increasing incentives to work”

    Incentives. The poor sitting around too lazy to do enough hours.

  • @Simon Shaw
    I hope you will take the following comment seriously, that is how it is intended.
    When you say “… Each year all sorts of people on very much average incomes inherit (maybe)£50,000, £80,000 or £120,000. ….” I realise you are using a common figure of speech. And I think most of us understand what you mean.

    I am not trying to undermine that point but to comment on it. My point is that in fact it is not “all sorts of people” who inherit houses or tens of thousands of pounds from deceased relatives. A significant proportion of the population never inherit much more than some furniture thatntheymhave no use for and a few personal possessions of little other than sentimental value. Some people inherit debts. For the children and families of people who have spent their lives in rented accommodation there is very little in the way of inheritance. For those paying the bedroom tax the amount they have left to pass on to their chidren is often verymminimal indeed.

    According to a recent piece in The Economist home ownership is in decline. For the younger generation, especially in London and the South East the opportunity to get onto the property ladder looks slim foranyone who,is not earning a salary considerably beyond the national average . The future for this generation is rented accommodation and declining standards of accommodation.

    So if government resources are stretched and we have to pay off an enormous deficit, these sorts of facts should inform policy making.

  • Another group who might benefit from the ISA changes would be those taking redundancy. However, personally I’m only on slightly above national average income, but am saving to one day buy a house. I welcome the fact that the limit is now higher than what I can save, and I also welcome the freedom to decide what I put in stocks and shares and what I keep in a cash ISA. I think it’s about time we had more incentives to save instead of spend.

  • Simon – congrats on evidence-based commenting! I am persuaded.

  • Eddie Sammon 21st Mar '14 - 10:36pm

    I must say I agree with Rob Parsons that no one should use the line “trapped on benefits” as an excuse to cut benefits. Being trapped on benefits is better than being trapped in poverty. If people want to cut benefits then cut them, but don’t pretend it is to do those people a favour.

  • According to HMRC’s statistics, in 2010-11 around a million people invested up to the limit in stocks and shares ISAs, and about 3.5 million invested up to the limit in cash ISAs:
    http://www.hmrc.gov.uk/statistics/isas/statistics.pdf

    So I think the numbers that will benefit from raising the limits are much larger than Simon Shaw’s inheritance example would suggest.

  • nvelope2003 22nd Mar '14 - 4:49pm

    Annuities might be a poor choice at the the moment but I think those who believe that everyone will benefit from this reform are being naive. I know people who have lost all their savings because of misguided actions and are now forced to rely on the state pension and help from friends who soon resent having to support someone who has behaved foolishly.

    There should be some requirement to put the money from a pension fund in some approved scheme as it has been subsidised by tax concessions and if it is wasted then the taxpayers will have to pay extra benefits to those who have spent all their money foolishly or wilfully.

  • @ Simon Shaw
    Thanks, I have skimmed through some of the ONS data you referenced and there is some fascinating stuff in there.
    It is not an area of ONS data that I am too familiar with . One thing that does leap off the page are the huge regional variations.

    I ithnk your analysis is fair enough and Chris’s later point also. There are a lot of people out there with tens or hundreds of thousands of pounds either from inheritance or from other sources. Andrew Neil recently mentioned on the Daily Politics that wages are now at an all time low as a percentage of national wealth whereas profits are at an all time high as a percentage of national wealth. I am not at all sure how that ties in with the rhetoric about “hard working families”.

    There is an interesting debate to be had as to how this shoud inform public policy at a time when we are told that deficit reduction is all important. Although it is difficult to believe that deficit reduction is that important when George Osourne’s achievements in this area are so far away from the targets hespun listed 4 years ago.

  • Eddie Sammon
    Well said ‘. Every MP should learn by heart your words —
    …….no one should use the line “trapped on benefits” as an excuse to cut benefits.
    Being trapped on benefits is better than being trapped in poverty.
    If people want to cut benefits then cut them, but don’t pretend it is to do those people a favour.

  • Eddie Sammon 22nd Mar '14 - 6:33pm

    Thanks John.

  • Mark Valladares Mark Valladares 22nd Mar '14 - 7:23pm

    @nvelope2003,

    The intention, as I understand it, is that if you waste the money, or make bad decisions, you will have to rely on the state pension which, in an earlier reform, will increase to £140 per week. There aren’t many benefits that pensioners are eligible for, other than that – excepting of course things like free bus travel, free television licences and winter fuel allowance.

    And, in addition, withdrawals above a certain percentage of the fund will be taxed at your marginal tax rate, i.e. potentially 40% or 45%. Therefore, there is a price to be paid for wilfulness if you make foolish decisions.

    Now, it is inevitable that people will make mistakes through greed – most investment scams lack credibility if you do any serious research – but the sort of people who make those mistakes can make them now anyway. I would therefore like us to do more to beef us financial regulation, including HMRC.

  • Malcolm Todd 22nd Mar '14 - 9:12pm

    Eddie Sammon
    “Being trapped on benefits is better than being trapped in poverty. If people want to cut benefits then cut them, but don’t pretend it is to do those people a favour.”

    I’ve never heard that odious argument so concisely skewered. Well done!

  • nvelope2003 23rd Mar '14 - 3:11pm

    Mark Valladares
    I hope that you are right but the opinion poll in today’s newspaper seems to indicate few (7%) would use the money for a pension which seems strange because they were paying in to a pension fund. I fail to see why those who are not using the money for a pension should get 25% tax free. If they are just using the money as income then the whole sum should be taxed as income. This whole scheme seems to be a new way to avoid paying tax.
    Many elderly people will be under huge pressure from relatives and “friends” to hand over their pension money which at the moment they cannot do. I see a pension pot misappropriation scandal unless very expensive arrangements are put in place to stop it. People will complain they were badly advised even if it is their own fault and huge sums will be needed to compensate them but this time the taxpayer will have to pay the compensation. And all those letters in the Daily Mail from imprudent old people complaining about how they were expecting a comfortable retirement but now they only have the state pension to live on. It will soon become impossible to resist the demands for Government help. The requirement to use a pension fund to buy a pension was put in for very good reason and that reason still applies but the Conservatives need to win an election and they do not care if the taxpayers have to pick up the bill. Boris Johnson got rid of perfectly good buses with years of life in them, restored totally pointless conductors who do nothing at great expense and gave free travel to people over 60 who can use it to travel to work in order to win an election but this reform is on a higher level and will cost a lot more money.

  • Peter Watson 24th Mar '14 - 11:45am

    @nvelope2003 “This whole scheme seems to be a new way to avoid paying tax.”
    This was one of my concerns so I will be interested in learning more about the details. For example, can a high earner load a pension in the last couple of years with high rate tax relief and then take the cash out and pay a lower tax rate?
    Even if it is not intended to be a means for tax avoidance, I am sure clever accountants will find a way to make it so 🙁

  • Absolutely right !

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