Further Thoughts On The UK Budget

Hardly surprising but the backlash on the “granny tax” George Osborne announced in yesterday’s UK Budget dominates the British newspapers today with both the Daily Telegraph and Daily Mail choosing that angle to lead their coverage.

Presumably Osborne decided to phase out the age-related benefit that dates back to 1925 in order to gain some revenue to pay for the giveaways – to pay for the raising of the salary ceiling for receiving child benefit and for increasing the personal income tax allowance.

Osborne claims the move is merely a tax simplification but he appears to have decided to favor the young –or at least the younger – over the older here, a curious move when it comes to electoral strategy as pensioners cleave more to the Conservatives than to Labour. Of course, Osborne is meant to be the Tories’ electoral strategist, so maybe he knows something here that others don’t. Maybe he’s banking on pensioners dying off!

Aside from the “granny tax”, the Budget is disappointing on two broad fronts. It doesn’t do enough to encourage enterprise and provide incentives for aspiration, and it doesn’t cut public spending, which as a proportion of Britain’s GDP has continued to rise under the Coalition government, along with Britain’s net indebtedness, a development that accounts for Fitch’s recent warning that Britain risks losing its Triple A rating in the next couple of years.

Despite the Chancellor’s claim that this was a Budget for enterprise, it wasn’t. Yes, Osborne has reduced the top rate of tax from 50 percent to 45 percent. That is not a brave or radical move, though. The higher rate wasn’t bringing in much revenue and there were signs that it was deterring the rich and entrepreneurial from settling in the UK. But is 45 percent low enough? The rich will still be paying over 50 percent when local taxes and social security contributions are taken into account.

The reduction in corporation tax is also a good thing and will help business. One hopes it will attract more companies from overseas to set up shop in the UK and encourage others thinking of leaving to remain.

But the Budget was devoid of any creative thinking in terms of using tax breaks and favorable government treatment for setting up business in enterprise zones, for example, a point well made by Alex Brummer in the Daily Mail today, who asked why the government is not offering “VAT and National Insurance breaks in enterprise zones.”

“There is virtually nothing in the Budget, either, to beef up a recovery that’s being driven by increased exports (a result of the 20 per cent devaluation of the pound against foreign currencies) or to place real muscle behind the kind of technological and research-based enterprises that are giving such a lift to the economies of America, China and India,” Brummer writes.

Overall, Osborne seems to have no faith in the proven tactic of cutting spending to allow tax cuts in order to stimulate the economy. And that is really dismaying.