There are twelve significant improvements announced in today’s budget:
• Personal tax allowance to rise still further
• Discounts for apprentice training
• An increase in the levy on banks
• Fuel duty increase cancelled again
• More help for first time buyers with 25% incentives on the Help to Buy ISA
• £1.25bn extra to be invested in mental health services children and young people.
• Tax incentives for savers
• Support for the oil and gas industry
• Measures to crack down further on tax avoidance and evasion
• Backing tidal power with a lagoon scheme in Swansea Bay
• More power and funding devolved to local areas
• Reform of the business rates system
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51 Comments
The scrapping of Class 2 National Insurance – a £146 a year poll tax for the self-employed – is very welcome too. Something I’ve been pushing for over the past couple of years. Details yet to be confirmed, though.
So which of the good things in this budget are Lib Dem in origin, and which of the bad things are from the Tories?
Can I ask Liberal Democrats to concentrate on the future and on Liberal Democrat ideas and policies for the future?
Please do not waste time defending a Comservative series of budgets and cuts from the last five years.
Please tell Danny A that going on the TV and saying that he is “very proud” of his work with Osbourne is poison in the ears of most of our voters and does not attract another voters.
50 days to a General Election ! Support amongst the voters still in single figures. Need to emphasise Liberal Democrat ideas and policies for the future. George Osbourne is a Conservative.
I don’t think there is any real difference on policy between the coalition leaders and this is a budget to get the coalition re-elected. It’s very unlikely the Tories will win enough seats to form a government on their own and Clegg’s only hope is he will have enough seats so the Tories need him. I think it’s pretty much what voters expect from a pre-election budget – he certainly wasn’t going to announce too many cuts or a increase in VAT was he.
Why build Council Houses when we can announce counterproductive policies such as “More help for first time buyers with 25% incentives on the Help to Buy ISA”
If it had been announced as more fuel to the house price bonfire in the hope of bribing few voters in Tory target seats at least it would have been honest.
@g
It’s a very simple answer: all of them and all of them, respectively.
A complete waste of time… With the advent of fixed term parliaments surely someone should have thought about banning any budgets in the last 6 months of a parliament. Having one immediately prior to an election will encourage gimmicks and giveaways and I imagine whatever the results a large number of these measures will cease to exist by the end of 2015….
This was pure electioneering from the Tories and Labour with both getting some Lib Dem bashing in for good measure..
• Personal tax allowance to rise still further
This money mostly goes to households already earning in the middle to higher deciles; why is it a good thing?
• Fuel duty increase cancelled again
This is a bad thing. Fuel prices have fallen; this is a good time to ensure that duties rise to secure government funds and ensure pressure on fuel efficiency remains.
• More help for first time buyers with 25% incentives on the Help to Buy ISA
More money for people who are already doing well; and more money fruitlessly pumped into pushing up house prices. This is a pretty mixed policy; good for those who benefit, bad for the wider picture.
• Support for the oil and gas industry
“Greenest government ever” my posterior.
One bad thing about this Budget – it was a Coalition Budget.
I would have thought that it would have been better to withdraw from the Coalition early in the year and differentiate the party by offering up the Lib Dems own proposals.
How long before this nonsense about abolishing the annual Tax Return is seen for what it is.? An attempt to hoodwink taxpayers into thinking something is being simplified when in fact the Chancellor has set a hare running that could conceivably be as disruptive and wasteful as the universal credit project.
Were the Lib Dems part of this?
Let us hope that the reforms are not discredited before the election or Labour will be the only beneficiaries.
I’m sure there are a few meaures worth highlighting but what does it all mean? Where is the British economy going and why? Our economy seems beset by structural weaknesses, out-dated infrastructure, poor investment, short-termism and a financial system that still isn’t functioning properly. I supported the Lib Dems in 2010 because I thought thy represented change. Now they seem to represent more of the same. We’re on just another credit fuelled consumer boomlet that will blow out sooner than you might think.
It’s pretty much what I expected. Still seems over reliant on expanding the housing bubble.; The penny off a pint is nice idea but could have gone further.
‘Jack’ at 8.01 pm. Agree 100%
Tomorrow’s Daily Mail headline is “Sun Shines On Savers” with the bullets:
Your savings tax-free up to £100,000
£3000 leg up for first time buyers
… but bankers to be hit with £5 billion bill
All the boxes ticked for getting those older voters back in the Tory fold .
Osborne also mentioned the fuel duty escalator freeze and used the memorable line “a tenner of a tank thanks to the Tories” (which rather implausibly suggests that the Conservatives are responsible for the global fall in the price of crude oil).
This was a budget aimed squarely at the demographics the Tories need for victory. It seems to me that it does nothing for the Lib Dems.
if you’re cynical it’s called populism.
if you’re a mature member of a political party seeking to govern it is called small pieces of a big picture that appeals across the ideological and geographic breadth of the country.
the common ground.
That’s right Paul – tax cuts for low and middle earners, further clamps on tax avoidance, restrictions on pensions tax relief for higher earners, reductions in austerity, debt being paid off, new jobs, help for first time buyers, billion pound investment in renewables and another billion for mental health, cuts in alcohol duty for pubs, bars and consumers, further support for North Sea oil, cuts in taxes on savings, increase in wages, bank levy to help pay for the crash.
Can’t think of anything that might appeal to Lib Dem voters there…
Why the negativity. There is a clear Lib Dem influence to this budget. Danny A is right to be proud. There are some real achievements from this Coalition and we should be claiming credit not disowning them.
A reasonably imaginative budget given that it was revenue neutral: lots of minor ‘giveaways’ (or ‘giving back to taxpayers’ as I prefer to think of it) and ‘takeaways’ cancelling each other out.
On the revenue-raising side, I’m surprised you didn’t include a welcome for the reduction in the lifetime allowance for pension contributions from £1.25 million to £1 million… This seems to be a favourite area for Lib Dems to seek extra revenue and this is actually a better way of doing it than restricting tax relief to the basic rate, which would cause all sorts of administrative problems as well as failing to recognise the basis on which tax relief for pension contributions operates (it’s in essence a deferral of tax not a traditional relief). Even so, one has to wonder how sensible it is to be continually tinkering with the tax treatment of pensions: it can hardly do much to promote the supposed aim of encouraging saving into a pension if the tax regime is so uncertain from year to year. I fear houses will again look a more attractive investment by comparison.
Adam: Good point, I second that. Overall there did seem to be some simplification in this budget as well as the usual proliferation of fiddly measures in the Brownite tradition.
Reform of business rates is important. Let’s see what the review comes up with. We really shouldn’t be taxing business property at all (as opposed to the land it sits on).
The support for the North Sea was warranted given not only the collapse in the oil price but the coalition’s ill-advised tax raid on the industry in 2011 (I believe that was one of Danny’s ideas – or was it an Osborne wheeze to pay for a fuel duty cut?). Even so, I’m not sure how much cutting Petroleum Revenue Tax will actually help since the industry isn’t paying much tax at the moment. Revenue from PRT has plummeted to under £1 billion. During the independence referendum the SNP set out plans that counted on (ahem) £8.3 billion…
Jack: I think you’ll find certain Lib Dem MPs in Scottish seats lobbied hard for the support to the oil industry…
Raising the bank levy and cancelling scheduled increases in fuel duty must be the two most predictable measures in a George Osborne budget 😉
Of course the one significant change in overall fiscal policy was that on these figures austerity now ends a year earlier, in 2018-19. As I expected, Osborne used up much of the room for manoeuvre he had given himself at the Autumn Statement. Notwithstanding the ‘plan’ contained in the AS, the Tories only ever committed to a surplus (of unspecified size), not a £23 billion surplus. They are now targeting a much smaller surplus of £7 billion, in effect budget balance with a small margin for error of 0.3% of GDP. He has used the difference to increase public spending in line with projected GDP growth in 2019-20 rather than holding it flat in real terms. Thus the public spending ratio will stabilise at 36% of GDP rather than falling to 35.2% as envisaged last December. This enables Osborne to deflect the 1930s/Road to Wigan Pier Labour attack line, which was always rather specious but rhetorically effective.
One other observation. As I noted in the other thread, the only reason the debt ratio starts falling in 2015-16 (a year earlier than the Autumn Statement forecast, and in line with Osborne’s original ‘supplementary fiscal rule’) is the timing of the sale of bank shares. Asset sales don’t reduce the headline deficit (Public Sector Net Borrowing) but they do reduce the stock of debt, which is driven by its flow counterpart the Public Sector Net Cash Requirement.
There is a sudden drop in PSNCR next year thanks to the asset sales which results in a very slight fall in the debt ratio in that year. Then by 2016-17 the deficit is small enough to keep debt-to-GDP stable. So broadly debt is stable as a share of GDP over the next few years and only starts falling noticeably in 2017-18. This, by the way, is why Osborne was able to claim that any deviation from his plan will result in the debt ratio rising, not falling. it’s because even with his relatively tough plan the debt ratio is only inching downwards over the next three years – ergo any loosening will cause debt-to-GDP to remain on an upward trajectory for some time.
As ever, a highly political budget but it managed not to be too economically damaging all the same, which is the most we can ask from the vast majority of Chancellors.
Paul In Wokingham 18th Mar ’15 – 10:59pm
“…..This was a budget aimed squarely at the demographics the Tories need for victory. It seems to me that it does nothing for the Lib Dems.”
Bullseye ! If our MPs do not get it, the voters will. The clue was in the Chancellor’s repeated used of the words “Conservatove Government” and “…from a Conservative Chancellor”.
It is a shame young Danny sitting behind him was in nodding dog mode. Liberal Democrat voters might be puzzled about why he was nodding so vigorously in agreement with the statements of success for a Conservative Long Term Economic Plan, from a Conservative Chancellor.
If 5% of the voters are puzzled it does not matter, the other 95% will know that this was a Conservative Budget after Five years of Conservative Government.
No doubt in the Western Cape that would be fed into a computer and private polls would prove that Danny Alexander is the best junior minister since David Lammy.
The inability of the Liberal Democrat ‘leadership’ to publicly differentiate/discriminate on a matter so important as the budget, so close to a General Election when we are fighting Conservative candidates in dozens of key seats, some of which are highly-marginal, says it all. Apparently Danny A is putting out some sort of statement today which will get SO much interest in the nation media ‘the day after’ the big event NOT.
John Tilley – you’re entertainingly splenetic as ever.
Unfortunately the facts get in the way of this – Osborne was interviewed this morning and stated explicitly that this was a COALITION budget with a different emphasis than one that would have been purely Conservative.
I know new travels slowly to the People’s Republic of Scouseland but do try to keep up.
Indeed Osborne is accused in the Tory press of “scaling back austerity and soaking the rich”. So no Liberal Democrat influence there, then.
Tabman, if the people believe out there in Elector Land that this was a Coalition budget why are we presenting outr ‘alternative budget’ today?
As ever in politics it is perceptions that count and the perception compounded by this budget process is that British politics is a two horse race.
Philip Rolle, above, has hit the nail on the head. We should have pulled the plug in a ‘surprise’ move over ‘budget disagreements in January. We should have sited all the goodies listed above as our ideas + a few others including that the ‘front loading’ of the cuts was a cynical political move that would stop the recovery in its tracks.
We should then have tabled a motion of no confidence and challenged Labour to support it. (think of the campaining opportunities if they hadn’t) and challenged the Tories to provide the necessary extra votes to trigger an immediate election If they in turn hadn’t , we would have entered an election count down, with the 14 day FTPA provision and an election in 7 weeks time.
The campaign would have begun on the issue of the three budgets, and which of these should be introduced immediately after the ensuing election.
As it is we have continued to show tactical naivety in giving Osborne a free kick at goal and helping Labour reinforce the next 49 days as a contest between the two ‘old parties’.
For fans of a further coalition, having our ‘draft’ budget listed and campaigned on would enable us after polling day, and given no overall majority, to negotiate on its base and show the public which of our provision were agreed and as a result of ‘trading’ on the loss of which others.
Why didn’t we? Either no one gamed it. Or it was considered too may have been too divisive with our coalition mates and might have jeopardised any new deal with the Tories in May.
I think it is all made clear this morning when on Radio 4 Danny Alexander explained that the Tories wanted to end the deficit a year earlier than the Lib Dems and Labour wanted to end the deficit a year later than the Lib Dems both of which would mean utter economic ruin for the UK, where as the Lib Dems wanted to cut a little less than the Tories and borrow a little less than Labour. The very kind gentleman interviewing Danny didn’t mention the fact that 5 years ago the coalition aim as to eliminate the deficit in one parliament and that Labours plan to half the deficit would lead to economic ruin – whereas now the coalition has reduced the deficit by 1/3.
As to what the distinctively Liberal Democrat economic vision – perhaps that will come when we have someone as spokesperson who understand economic and Liberalism, which rules out Danny on both counts.
Bill Le Bretton – “Tabman, if the people believe out there in Elector Land that this was a Coalition budget why are we presenting our ‘alternative budget’ today?”
Because it’s a COALITION budget; hence it is a compromise and both the Tories and ourselves would have had different budgets with different emphases if we’d been in Government singly. We’ve had a coalition for 5 years now; haven’t you got it yet?
Caractacus. I’m no fan of DA – David Laws choosing alternative rooming arrangements is one of History’s great What Ifs ….
Caracatus, if Alexander has said that, then, it just shows that we have no intention of campaigning on a radically different economic policy to the Tories or to Labour. It is an attempt to say that there is very little between the three parties – a matter of £20 billion out of three quarters of a trillion!
How do you inspire people with that kind of ‘middle of the road’ ‘split the difference’ nonsense.?
Why aren’t we kicking up a stink about the dangerous front loading of the cuts by the Tories? As Olly Grender has just tweeted, “Osborne warns re veering off the current plan but that is EXACTLY what the Tories are doing”
With respect, that does not match up to saying there’s just a few billion between the three of us.
Tabman,
Jam tomorrow ….income tax cuts far ahead in the future (the tax allowance won’t hit £11,000 until 2017-18)….
A large proportion of the population have no savings (29%). At a household level, for those that do have savings, the average is £4,000. If this amount was saved in a typical instant access account, the new tax allowance would save someone less than £5 a year
Pain Today…..Spending cuts from 2016 to 2018 will be deeper than planned and George still hasn’t identified where they’ll be..
Still, try and sell the good bits as LD and the bad bits as Tory. It hasn’t worked for 5 years but, who knows, 50 days may be enough…
As for Alexander ‘nodding along’, didn’t I see Nick doing his bit…
Tabman, answer the question: why are we promoting out alternatives today? Is Osborne coming back on Friday with his Alternatives? I think not!
And if its is to be PERCEIVED by the public as a Coalition budget (and that is frankly all that matters) why is Olly Grender quite rightly tweeting, ” Osborne warns re veering off the current plan but that is EXACTLY what the Tories are doing”?
Is the Coalition budget veering off the ‘current plan’ or are the Tories veering off the current plan and if so, what is the budget? On plan, off plan? A coalition budget or a Tory budget?
Your political naivety is painful. Tell us who you are and what record you have of actually winning elections?
Bill le Bretton – no record of winning elections … apart from running a campaign (against a Tory incumbent) that saw a massive swing to the LDs.
Still, you know best.
• Fuel duty increase cancelled again
I don’t regard this as an “improvement”. With oil prices falling, now’s the time when fuel duty can be increased without it causing a rise in prices.
There was a time when Liberal Democrats were in favour of increased fuel duty as part of our general commitment to green policies.
• More help for first time buyers with 25% incentives on the Help to Buy ISA
Again, not much of an improvement. It only helps the diminishing number of well-off people who can still afford to become first time buyers, and does so at the expense of yet more pushing up of house prices in general.
• Personal tax allowance to rise still further
Again, this is of help only to comparatively wealthy people. It does nothing for anyone who doesn’t earn enough to reach the tax allowance level, apart from reduce government income leading to the necessity of more government spending cuts (likely to hit those who didn’t benefit from the tax cuts).
There was a time when we proudly campaigned for higher income tax in order to pay for better government services (“penny on tax for education”). That went down well because people could see the point. There are so many things in a state of crisis due to government spending cuts, in many cases, perhaps most cases now, those cuts are counter-productive as they will have knock-on effects which lead to more government spending later. I think the people of this country are adult enough to be able to understand that point, let’s treat them as such and make it, rather than play the Tory game of boasting about tax cuts without mentioning what that’s going to lead to in terms of government services.
Matthew Huntbach 19th Mar ’15 – 11:43am ….• Fuel duty increase cancelled again.. I don’t regard this as an “improvement”. With oil prices falling, now’s the time when fuel duty can be increased without it causing a rise in prices….There was a time when Liberal Democrats were in favour of increased fuel duty as part of our general commitment to green policies……
We were also against “subsidised” nuclear power…..However, forcing all energy users to pay for nuclear power through their bills ISN’T deemed a subsidy…As Duncan Brack said “‘If it looks like a subsidy and smells like a subsidy, it is a subsidy”…
malc
I don’t think there is any real difference on policy between the coalition leaders and this is a budget to get the coalition re-elected. It’s very unlikely the Tories will win enough seats to form a government on their own and Clegg’s only hope is he will have enough seats so the Tories need him.
Which will destroy the Liberal Democrats.
When the Coalition started, we were told we had to accept it because it would be irresponsible to leave Britain without a stable government, and we had come up with a reasonable compromise agreement between the parties. We were not told it meant we had to pretend that whatever policies it came up with were now Liberal Democrat policies, and that we could not revert to what we stood for before that agreement was agreed. How many of us would have agreed to it if we were told that? So, if right up to the election we cannot campaign on what were our policies and what would still have been our policies if it had not been for the random effects of the distortional representation electoral system we have, how can we carry on as an independent party? After another five years of this, memories of the Liberal Democrats as what they used to be will be dim, we will be seen as indistinguishable from the Conservative Party, Why then would anyone vote for us?
It may be that all that matter to Clegg and his immediate advisers is that he has a government job, and they have all the trappings that go with that. So what? What right has he to destroy the party he is supposed to be leader of just for his own personal advantage and those of a few people who surround him?
Matthew,
I agree and would add that the problem with playing up this budget is that virtually no-one is interested in the Lib Dem input. As far as the coverage is concerned this is all Osborn. The lib Dem Party needs to reconnect with its distinct voice. Fighting an election as if a coalition can be anything other than an accident of arithmetic at this stage is like playing for a draw in a relegation battle. It’s overly reliant on the other parties underperforming rather than the Lib Dems performing well.
Big picture of this Budget? Broadly revenue neutral if you look at the policy decisions table on pages 64-5 of the Red Book, which is sensible given the economic situation. But look at the main switches in cash terms –
MONEY SPENT ON – further increases in the income tax personal allowance (top Lib Dem policy from the last manifesto), tax cuts to encourage saving and mental health services (another Lib Dem priority)
PAID FOR BY – taxes on banks, a range of anti-avoidance measures and reduced limits on tax relief for pension contributions (all of which the party favoured last time I looked)
Pretty good work in my view.
Of course, no harm in pointing out how much more a majority LD administration could achieve…
George C
MONEY SPENT ON – further increases in the income tax personal allowance (top Lib Dem policy from the last manifesto), tax cuts to encourage saving and mental health services (another Lib Dem priority)
PAID FOR BY – taxes on banks, a range of anti-avoidance measures and reduced limits on tax relief for pension contributions (all of which the party favoured last time I looked)
It misses out paying for the income tax cuts with property taxation and with taxes on environmental damage. This was in the 2010 manifesto. Not mentioning these two things is a significant shift away from what were distinctive aspects of the Liberal Democrats, and a shift towards the Conservative line, which does not like that sort of thing.
I was happy to support the 2010 policy on tax fairness as a whole. Taking out those aspects which Conservatives don’t like and emphasising those aspects which they do is not the same.
@ Matthew
“With oil prices falling, now’s the time when fuel duty can be increased without it causing a rise in prices.”
When the oil price rises, would you support fuel duty cuts? If so, what you are advocating is a ‘fuel duty stabiliser’ intended to stabilise the real cost of road fuel. Like most tax measures, this has its pros and cons. The advantage is that it would stabilise one important component of household budgets; the disadvantage is that it would destabilise the public finances, causing greater volatility in tax revenue. This is a particular concern when the government is budgeting for substantial deficits well into the future.
“There was a time when Liberal Democrats were in favour of increased fuel duty as part of our general commitment to green policies.”
Indeed there was. Unfortunately it was never spelled out what level of fuel duty would be considered ‘enough’, or what would be the test of the success or failure of the policy. This is a more general failing with tax proposals I find: there is little sense of the eventual magnitude or the intended destination (in terms of either the tax rate, or the policy outcome).
In any case, the Lib Dems were not alone in wanting to increase fuel duty: there was a consensus on it across the three main parties. As you will recall, John Major’s government introduced a fuel duty ‘escalator’ which provided for above-inflation increases in the duty, originally of 3% and later 5%. The Labour government hiked it still further to 6% above inflation, taking the tax share of the pump price to a whopping 86% in 1999.
This culminated in the fuel protests in 2000 and prompted a major climbdown and moderation in duty rates. This, reinforced by successive nominal freezes in duty rates under the coalition, eventually brought the tax take down to about 60% of the pump price, still high by international standards (including most of our European neighbours) but less dramatically out of line. Of course the recent falls in the pump price have increased this ratio again, but given that petrol prices have been falling (and the burden of duty falling in real terms) that has not been a concern.
What this potted history tells us is that governments have found it necessary to balance the environmental arguments for higher fuel duty with the public appetite for lower fuel duty, which is evident at all times but particularly when rising oil prices are squeezing their disposable income. They went way beyond the limits of public tolerance at the end of the 1990s. Now, with oil prices falling, there would appear to be scope to increase duty but in fact politicians from all parties are reluctant to do so (this is certainly not a right/left thing: the SNP, many Labour MPs and Lib Dems in rural seats are just as devoted to low fuel duty as any Tories) . Part of that reluctance reflects an awareness that household budgets, though improving, are still under strain. Labour, for example, would immediately shoot their ‘cost of living’ campaign in the foot if, having seen their plans for an energy price freeze overtaken by events, they were now to call for a rise in fuel duty. They know that the stiffest resistance to fuel duty hikes comes from their target voters.
The reason is that the public do not take the same view of the balance to be struck between environmental goals and their own personal finances as politicians who on the whole are much better-off than them. In distributional terms fuel duty bears heavily on middle-income households who spend the largest proportion of their income on petrol/diesel.
Tabman 19th Mar ’15 – 10:54am
Bill le Bretton – no record of winning elections … apart from running a campaign (against a Tory incumbent) that saw a massive swing to the LDs.
Good – your much better qualified than the current incumbent campaign chief….
Also, Matthew, it’s interesting to reflect that the Lib Dems sided with Labour and with a Tory backbench rebellion when Ken Clarke as Chancellor was trying to apply the main rate of VAT to domestic fuel and power at the end of 1994, and thereby helped to pull off a dramatic government defeat.
Yet, as the IFS persistently argue, there is no sound economic rationale for having a reduced rate of VAT on domestic fuel, let alone an environmental one. Indeed, the result is that currently there is actually a negative carbon price for household gas. (And it would be perfectly possible to compensate low-income households for the effects of VAT on fuel while raising net revenue.)
But there was a big public outcry about the proposal, and there was (and no doubt remains) an obvious political rationale for taxing domestic fuel preferentially, which is that taxing one of the most sensitive items in the household budget is unpopular. Plus of course the opposition parties saw the opportunity to make political capital out of defeating the government, which one suspects was the principal motivation.
Like the recent Lib Dem support for fuel duty freezes/cuts, this episode from 1994 illustrates that Lib Dem MPs are not so keen to stay true to their green credentials that they will give it a higher priority than the more pressing concerns of voters. It also illustrates the fact that, inevitably and understandably, politicians of all parties have difficulty juggling competing objectives: there is an environmental case for higher fuel duty and full VAT on domestic fuel, but there is also a desire and a strong political incentive to avoid taxing necessities. It is a matter of priorities at any given time.
The main reason The Tory government in the 1990s introduced a fuel duty escalator and extended VAT to domestic fuel (albeit at a reduced rate following its Commons defeat) was that, although it knew these measures would be unpopular, it needed to reduce a substantial budget deficit. Likewise Gordon Brown was looking for revenue in the late 1990s when he hiked fuel duty.
These trade-offs are a matter of judgement and illustrate how political and economic arguments are rarely as black and white as they are often portrayed by partisans on all sides. Quite often Chancellors from different parties wrestle with much the same dilemmas.
Alex Sabine
The reason is that the public do not take the same view of the balance to be struck between environmental goals and their own personal finances as politicians who on the whole are much better-off than them. In distributional terms fuel duty bears heavily on middle-income households who spend the largest proportion of their income on petrol/diesel.
Yes, and had fuel duty been increased at the same time as tax allowance was increased, I’d have been happier to accept the increase in tax allowance. This is the point I was making – our position used to be that we would shift some of taxation away from income towards other things, where there additional beneficial effects from taxing those other things. I very much resent the support I gave in the past to that position being turned round by the party leadership now and presented as if it was just a support for reduction in income tax.
Of course the general public will say they oppose any tax if you ask them “Do you oppose that tax?”, which is why we need the sort of politics which can manage a more mature debate and better get across the message that one of the prime things that government does is balance raising taxes against expenditure, so if you want government expenditure you have to accept there will need to be taxes to pay for it, and then see what you would think is the best form of taxation to do it. Instead of this, we tend to have debates where the political right put taxes as just a bad thing that bad people propose out of “envy” or delight in seeing people hurt by them, and the political left go on and on attacking the political right for making “cuts” but don’t actually point out that if you don’t have those cuts you must instead have higher tax.
I do think the recent fall in oil prices was an opportunity to put up fuel duty without that having so much of an impact as doing it had when oil prices were rising. Because of this I don’t see boasting about not doing so as something we should be doing. I do also appreciate that many of our MPs, Danny Alexander in particular, represent constituencies where there is more need for doing lots of driving than there is where I live. So I certainly wouldn’t blame Danny if he were boasting about this in his own constituency literature.
@ Matthew
“Yes, and had fuel duty been increased at the same time as tax allowance was increased, I’d have been happier to accept the increase in tax allowance.”
Supposing the government had taken up your suggestion during the past year or two, do you think the two coalition parties would have been more vulnerable or less vulnerable to Labour’s ‘cost of living’ charge? Other things being equal, the cost of living would clearly be higher if fuel duty had been raised, since the price of road fuel is one its key determinants.
It’s true that doing what you suggest would have clawed back the income tax gains from above-average earners on, say, £30K-£50K, which is presumably what you would like to have seen to offset the effect of the higher personal allowance. (Those earning above £50K or so have seen the gains offset anyway by successive real cuts in the higher-rate threshold that have dragged millions more into the 40p bracket.)
It would also have hit those in the £20K to £30K bracket and offset many of their gains from the higher PA. It is a very broad group of middle-income people, and plenty of low earners too, who bear the cost of higher fuel duty, not just those further up the income scale. I haven’t got data to hand but I believe last time an estimate was made it was bang in the middle of the income distribution that people saw the highest fraction of their income go on petrol/diesel.
It would also have hit pensioners who would have to pay higher fuel duty but have not benefited from recent rises in the PA because they previously had a higher age-related allowance and this differential has now (rightly in my view) been closed. Don’t get me wrong, pensioners have been beneficiaries of government policy decisions in other areas – the triple lock, protection of pensioner benefits, lower taxes on savings income etc – while on the other hand they have suffered from ultra-low interest rates. I’m just pointing out an obvious distributional effect of your suggested policy that would need to be taken into account. You could offset this effect through further increases in the state pension, for example, which would be simple if fairly ill-targeted; or you could increase the means-tested pension credit though this suffers from non-takeup.But doing either of these things would mean that raising the PA alongside offsetting rises in fuel duty would not be neutral but would cost net revenue.
Then there are those low-income households who might not benefit from the higher PA (as you have often pointed out) yet in some cases will have a car and would see their outgoings go up without a compensating rise in their incomes. Provision would have to be made for them, too.
This is a complex area. In the long run, as the IFS have repeatedly argued, fuel duty revenue is likely to be in secular decline as cars become ever more fuel-efficient. In any case, fuel duty is a blunt instrument for capturing the congestion costs of motoring, which in economic terms would be much more efficiently tackled through road pricing (though there are big technological and political obstacles to extending this on a large scale). Yet, as the IFS have written: “Current rates of fuel duty can really only be justified in the light of the congestion costs of motoring, and these costs would remain even were all vehicles electric. This illustrates the fact that fuel taxes are particularly poor at targeting congestion costs. Thus there is a strong case for pricing congestion separately from the other environmental costs associated with motoring.”
As they say, this would imply a large reduction in fuel duty not an increase: “Fuel consumption is, of course, much more closely related to the carbon emissions from motoring, but fuel duties are far higher than could be justified by any plausible estimate of the damage caused by carbon emissions alone. Congestion is by far the largest cost to society imposed by motoring: a study for the Department of Transport put the likely cost of congestion in 2010 at 12.3p per kilometre driven, compared with 1.6p for all other environmental and safety costs put together.”
@ Matthew
“…Our position used to be that we would shift some of taxation away from income towards other things…”
Well there have been quite a few different “positions” on tax policy in the past decade or so. At least up until 2005, before the supposed takeover of the party by “Orange Book neo-liberals”, the Lib Dem position was not just to shift around the tax burden but to increase its overall size. And back then there was no evidence of a desire to shift taxes away from income: on the contrary, there were proposals for a penny on the basic rate and a higher top rate, and indeed the abolition of one (loosely) property-based tax, council tax, in exchange for a local income tax.
So the pattern was very much to shift taxes away from property and onto income. In my view this was the wrong direction to go in, and the big shift on this after 2005 (following a series of tax reviews) was an improvement. But in its defence the party did have two decent, and certainly popular, arguments to support its previous policy of abolishing council tax: it used to say that it was regressive, which is true at the top end certainly and within the bands; and it argued that housing wealth was an unreliable guide to “ability to pay”, that it was wrong to levy a tax on an asset that is not linked to a cash flow with which to pay an annual tax. These are important objections that need to be addressed. The second objection has not been satisfactorily answered by the proponents of a mansion tax, as has been discussed elsewhere.
But the point is that the post-2006 tax approach has been in stark contrast to the earlier emphasis on raising income tax at all levels: basic rate, higher rate, plus a local income tax replacing council tax. It is misleading to accuse the Lib Dems in government of abandoning the party’s tax policy approach without recognising the previous history and evolution of party thinking in this area.
In terms of how the coalition has financed its increases in the personal allowance, those implemented so far are costing the Exchequer £9 billion or so per annum. There have been real-terms (not cash) cuts in public spending and there has been a rise in VAT. These have been instruments of deficit reduction, but of course the higher PA has widened the gap between revenues and outlays that the government has had to close.
Clearly it would have been possible not to raise the PA and thereby to have reduced the scale of deficit-reducing measures by £9 billion. The counter-argument is that it is a nonsense to be charging income tax on people earning less than the full-time minimum wage, ony to make them then apply for tax credits (though, as I have often noted, the same argument applies to National Insurance). Anyway, in political terms the higher PA was a key Lib Dem policy, a key demand in the coalition negotiations and something you can present as a ‘win’. So let’s assume for the sake of argument that this was the right priority.
You complain that there have been no offsetting measures of the kind that the Lib Dems proposed in 2010. I’m not sure the evidence backs that up. In some cases – restricting tax relief on pension contributions, for instance – the specific form of the Lib Dem proposals has not been adopted (for economic and administrative reasons that I have explained before, restricting pensions tax relief to the basic rate is problematic), but the coalition has raised significant revenue from sharply restricting the lifetime allowance and the annual allowance. Indeed, the lifetime allowance was reduced once again in this week’s Budget. So the objective has been pursued by different means.
In other cases, the preferred Lib Dem approach has been adopted but hasn’t gone as far as the Lib Dems proposed in 2010. So capital gains tax was raised from 18% to 28% in Grorge Osborne’s first Budget. The differential between the tax rates on capital gains and income has been sharply narrowed compared to the huge gap between the two under Labour. The Treasury reckoned at the time that 28% is close to the revenue-maximising rate. So in this case, the Lib Dems got about half of what they wanted but not the full demand. As you are always reminding what you call the ‘nah nah nah’ people , coalition is about compromise; so for the Lib Dems to have a small minority of government MPs but get half the increase they proposed in CGT looks like not a bad exercise of influence.
The coalition has also introduced numerous other measures to raise revenue and help defray the costs of increasing the PA. There has been no mansion tax, but stamp duty at the top end has been increased very sharply (as well as, more recently, the structure improved). The bank levy has been raised in budget after budget. More measures have been introduced to tackle tax evasion and aggressive tax planning than were laid out in any of the party manifestos, and arguably have been pursued rather more vigorously than was the case under the last Labour government. Green taxes have been raised, although the cost of living squeeze and the spike in oil prices in the early part of the parliament has prompted the government to ease the burden of fuel duty, with enthusiastic Lib Dem support. Reductions in the higher-rate threshold have sharply increased the number of 40p taxpayers: indeed this is one of the principal ways the government has limited the cost of raising the PA. Of course the big tax cut at the top end has been the reduction of the additional rate from 50p to 45p, but the revenue impact of this has been negligible. (The Treasury’s ‘ready reckoner’ suggests that reverting to 50p would raise at most £500 million, and this is not based on ‘dynamic analysis’ of the second-order effects etc.)
All in all the claim that there have been no offsetting measures to raise revenue from the better-off does not stand up to scrutiny.
Alex Sabine
And back then there was no evidence of a desire to shift taxes away from income: on the contrary, there were proposals for a penny on the basic rate and a higher top rate, and indeed the abolition of one (loosely) property-based tax, council tax, in exchange for a local income tax.
Yes, and I was opposed to the policy of replacing council tax by yet more income tax. I remember, I was a councillor at the time, and the council had a committee which was putting together a report on local taxation. The Labour councillors on the committee turned to me, expecting me to put the case for local income tax and were somewhat surprised when I said, no, it might be the official policy of my party, but I was against it.
In the only speech I ever made at the Liberal Party Assembly, it was in 1986, I put the case for shifting tax from income to property. It’s something I’ve supported long-term.
Alex Sabine
it argued that housing wealth was an unreliable guide to “ability to pay”, that it was wrong to levy a tax on an asset that is not linked to a cash flow with which to pay an annual tax. These are important objections that need to be addressed. The second objection has not been satisfactorily answered by the proponents of a mansion tax, as has been discussed elsewhere.
Yes, and I have myself put the case of the “little old lady in the big house” many times against those who suppose that introducing large scale land or property tax would be easy.
However, we used to have the rating system, which imposed a much greater tax on property than council tax. Go back further, and we had Schedule A income tax as well. In the past it was well understood that people who owned property had a duty to society to generate wealth for society. Anyone who had the money to invest in buying a big property should invest some of that in something which will generate income to pay the tax on the property.
In practice, I think the little old lady in the big house could be permitted to pay the tax in the form of a loan secured on the house, with a guarantee she will never be forced to leave the house. Now, her heirs lose out, but let us consider. If they need the property, paying the tax on it is still going to be cheaper than those who didn’t chose the right parents have to pay to get that sort of house. If they don’t need the property, it’s just a big dollop of cash, and sorry, I don’t weep for them if that big dollop of cash is somewhat reduced. If it means we can encourage enterprise and work more by taxing it less, that’s a good thing, isn’t it?
Alex Sabine
Supposing the government had taken up your suggestion during the past year or two, do you think the two coalition parties would have been more vulnerable or less vulnerable to Labour’s ‘cost of living’ charge?
My suggestion was for now, not two years ago. The point I was making was that the recent fall in oil price gives us room to reconsider what we dropped, for the reasons you outline, when oil prices were rising rapidly.
Alex Sabine
So in this case, the Lib Dems got about half of what they wanted but not the full demand. As you are always reminding what you call the ‘nah nah nah’ people , coalition is about compromise; so for the Lib Dems to have a small minority of government MPs but get half the increase they proposed in CGT looks like not a bad exercise of influence.
Yes, I think the agreement for higher CGT was perhaps the most significant gain for the Liberal Democrats in the coalition. I was quite surprised by it, as it goes very much against the Tory grain.
OK, Matthew, I’m glad you were arguing against higher taxes on income as long ago as 1986. You mention you were against the party policy of replacing council tax with local income tax. Were you also against the penny on the basic rate and the higher top rate which were the central pillars of Lib Dem tax policy in successive general elections? I don’t remember higher property tax being in the Lib Dems’ ‘platform’ until the Orange Bookers came to prominence post-2005, but please correct me if it was party policy in the late 1980s or 1990s.
It’s good that you are independent-minded, there is nothing wrong with disagreeing with the party line. I just don’t think the impression should be allowed to take hold that the Lib Dems have always argued for such a tax shift when in fact it is a relatively recent development and up to 2005 they were arguing for a shift in the opposite direction. Overall the coalition has both cut taxes on income and increased taxes on property (through stamp duty hikes) in line with the recent Lib Dem direction of travel.
“Go back further, and we had Schedule A income tax as well.”
You are going back quite some way there, but you’re right: Under the old schedular system of income tax, the implicit or ‘imputed’ rental income from owner-occupation was taxed. This was abolished in 1963. However, because valuations were not regularly undertaken (which seems to be a regular theme with property-based taxes), the imputed income was not at all accurate: the prospect of a big jump in liabilities when the housing stock was due to be revalued for the local rates in 1963 was what prompted Schedule A’s demise.
You suggest that there was a greater reliance on property taxation while Schedule A was in place than there is today, but that isn’t actually the case. Remember, there was also unlimited tax relief on mortgage interest, which meant that interest payments were paid out of pre-tax income, not out of taxed income as is the case today. For most owner-occupiers their Schedule A liability was more than offset by the value of the tax relief on mortgage interest, so there was still a net subsidy and bias towards this form of housing tenure.
The period of greatest ‘generosity’ towards property owners was in fact the period between 1963 (when Schedule A was abolished) and 1974 (when a ceiling was placed on the size of mortgage against which tax relief could be claimed). Throughout the 1970s mortgage interest remained tax deductible up to a high ceiling. This was a very valuable tax relief when you consider that marginal tax rates were as high as 83% on earned income and 98% on savings income, and even the basic rate was in the 30-35% range. Also bear in mind that while nominal interest rates were typically pretty high in the 1970s, inflation was higher still so for much of the period interest rates were sharply negative in real terms, easing the burden of mortgage repayments.
In the 1980s, despite Mrs Thatcher’s afinity for owner-occupiers, the loan ceiling was allowed to fall sharply relative to house price inflation, steadily eroding its real value. Then from 1991 the Major government began restricting the rate at which tax relief could be claimed, in effect phasing out mortgage tax relief – a process that was completed by Gordon Brown at the end of the 1990s. So by 2000 we had no Schedule A but also no tax subsidy for mortgage interest.
The other thing you need to consider is that residential stamp duty was charged at much lower rates (it was a flat 1% in 1996) until Gordon Brown introduced a graduated rate structure and sharply increased the tax take from it. George Osborne has continued to increase stamp duty rates at the top end while also reforming its structure. So this is a substantial extra source of revenue from property compared to the earlier period you were referring to.
@ Matthew
“Yes, I think the agreement for higher CGT was perhaps the most significant gain for the Liberal Democrats in the coalition.”
It’s interesting to note that the revenue from CGT was £7.8 billion in 2008-09 (when the rate was 18%), £3.9 billion in 2013-14 and is forecast to come in at £5.7 billion for 2014-15. Of course, CGT revenues are affected not just by the rate but by the level of capital gains being realised. It’s clear that during the recession and early phase of the recovery you would expect CGT revenues to fall, since it is a tax whose yield is inherently cyclically volatile. But the stock market has performed well during most of this period and the housing market has been strong for the past couple of years. CGT is paid through self-assessment so there is a delay before the receipts come in, but even so these figures look a bit weak.
It will be interesting to see how CGT revenues evolve over the next few years, and what this might tell us about the impact of the higher rate introduced by the coalition. The Treasury suggested at the time that 28% might be close to the revenue-maximising rate, but the Lib Dems now want to go further. It is not clear to me that you can count on much revenue from doing so. According to the Treasury’s ‘ready reckoner’ each 1 percentage point increase in the CGT rate would raise a trifling £30 million.
Arguably a more important role of CGT is to protect against erosion of the income tax base. The interaction between the two – and the cyclical volatility of asset values and capital gains – makes it hard to draw definitive conclusions about the link between changes to the rate of CGT and the overall revenue yield from those changes. Income tax receipts have been fairly weak in recent years but that reflects low earnings growth, less extravagant top pay, and the coalition’s increases in the personal allowance so it is hard to disaggregate all this and estimate the impact of the CGT change. But the evidence so far suggests scepticism about counting on much revenue from further hikes in the CGT rate.
“I was quite surprised by it, as it goes very much against the Tory grain.”
I agree with you that the Tories tend to resist taxes on capital (witness their penchant for cutting inheritance tax) and capital gains. However this rule does not always hold. Tory Chancellor Selwyn Lloyd introduced a tax on short-term gains in 1962, at a time when there was no CGT as we know it today.
And – perhaps this comes as a surprise to those who see him only as a friend of the rich and don’t acknowledge his efforts in the field of tax reform – Nigel Lawson increased CGT from 30% to 40% in his 1988 Budget, the one remembered for his cut in the top rate of income tax from 60% to 40%. So he aligned the rates of income tax and CGT while providing for proper indexation of CGT so that the inflation element in capital gains was not subject to tax. The popularity, and higher profile, of his income tax cuts with his own side gave him cover to increase the CGT rate which ordinarily would have gone down badly on the Tory benches.
It was Gordon Brown who unpicked this system when he got rid of inflation indexing and introduced taper relief, which reduced CGT rates on assets held more than a few years. To be fair to Brown, this was a genuine attempt to boost entrepreneurship, by reducing the CGT rate faced by business owners when they came to sell their businesses, thus increasing their returns. It was also intended to encourage long-term investment, although this was rather undermined when he soon reduced the time period over which the rate tapered downwards.
The downside was that Brown’s reforms made a complicated tax even more complicated, and created a big incentive for ‘income shifting’, ie those with the flexibility to do so were able to dress up what was really income as capital gains and pay a much lower rate of tax than they otherwise would. On the other hand, very few countries levy a comprehensive CGT at 40% so perhaps some reduction in the rate was inevitable to protect the overall revenue base.
@ Matthew
“My suggestion was for now, not two years ago. The point I was making was that the recent fall in oil price gives us room to reconsider what we dropped, for the reasons you outline, when oil prices were rising rapidly.”
Sure, I take your point, which is why I asked if you were proposing a symmetrical ‘fuel price stabiliser’; or, alternatively, to raise duty when oil prices fall but not cut it when oil prices rise, thus increasing the long-term level of duty when adjusted for fluctuations in the oil price – putting an upward bias on pump prices – with the aim of reducing consumption.
But whichever of these approaches you took, the policy implication in the past year or so – or even just ‘for now’ as you say – would be the same: to raise fuel duty. This wouldn’t necessarily raise fuel prices, because the higher duty would be offset by the falling underlying price. But it would prevent the fall in pump prices that has acted like a large VAT cut, giving household budgets a much-needed boost and stimulating consumer spending (home demand rather than the markets of our oil suppliers). It would thereby prevent the modest rise in real take-home pay which is now underway. Relative to the current situation, the effect would be to increase the cost of living, since it would prevent petrol/diesel being one of the items of household spending that is exerting downward pressure while other items would still be exerting upward pressure. It seems odd to object to austerity while simultaneously negating the most potent source of demand stimulus that is currently available.