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.

 

 

So Has Plan A Been Ditched?

The credit rating agencies are likely to fall for it – Fitch has warned that the UK may lose its triple A rating in the next two years – but does Goerge Osborne’s Budget make much sense, if he’s wedded, as he says he is, to his Plan A of stiff public spending cuts?

There are some substantial giveaways in the Budget – the top rate of tax cut from 50 percent to 45 percent, an increase in the personal tax allowance, and the raising of the income ceiling  on child benefit, etc. And, of course, there’s the cut in corporation tax.

The Chancellor says this is a Budget on the side of aspiration and enterprise. Certainly, to attract foreign business to the UK, and to encourage domestic firms to remain located in the country, the corporation tax reduction is a good idea. The cut in the top rate of tax is likely also to encourage the super-wealthy to remain.

But how is this to be paid for? The Chancellor talked vaguely about clawing back another 10 billion pounds in welfare benefit cuts annually but absolutely no details were provided.

One slice the of the population that doesn’t come out of this well is the elderly. The phasing out of the age related allowance for pensioners is going to hit them. I can’t quite see the sense of this.

The UK is facing already a pension time-bomb, as other developed countries are too. UK pensioners and those close to pension age have been hard hit by low interest and annuity rates since the financial crash and now they will lose out on the phasing out of the age related allowance. In short, the government is aggravating the problem that will come with the greying of the country.

So, is this Plan A-? I am not sure the Chancellor has done enough to encourage growth and enterprise with this Budget – a growth that can bring in more tax revenues to cover the giveaways. And neither am I sure this Budget will be as tax neutral over five years as the Chancellor claims it will.

Would Stubborn UK Inflation Have Anything To Do With High Taxes?

Now why would UK core inflation remain stubbornly high? Anything to do with high income taxes, high business rates and high sales tax and government and local government fees slapped at every twist and turn? Plus government consistently over-paying for staff, services and vendors. What remains amazing is how the British press, including Conservative papers, seldom make the link.

The U.K.’s Consumer Prices Index has remained at 3.1pc for the sixth month running. Obviously there is a connection with higher international commodity prices – for example, cereals have gone up because of wheat price increases partly as a result of this summer’s forest fires in Russia.

But services inflation climbed to its highest rate since February 2009. It is now well above its low of 2.3pc in November. At least the Daily Telegraph noted that there might be a link with the upcoming jump in VAT (national sales tax). It quotes a retail expert, Neil Saunders of Verdict, suggesting that shops are already beginning to increase prices ahead of next year’s VAT increase to 20 percent.