Coffee House

Twelve points about the Budget

21 March 2012

There’s much to applaud in this budget, but as ever we in Coffee House are focusing on things jumping out from the small print. Here are a few things I’ve noticed so far.

1. Don’t mention QE. In his Pre-Budget Report, Osborne was candid about his economic policy: ‘fiscal conservatism, but monetary activism’. That is to say,
fiddling about on the margins with taxes, while the Bank of England — 100 per cent owned by the Treasury — is midway through the largest QE experiment ever attempted in the developed
world. It is impossible to understand Osborne’s economic policy, his Budget and those it affects without also considering the effects of QE — the inflation, the low interest rates and
the game-changing implications. But it’s striking how Osborne made no mention of it at all.

2. Pensioners hit. The giveaway to the low paid has been partly financed by freezing their tax-free allowance at £10,500 — it’ll stay there until the tax-free
allowance for earners catches up. The Treasury justify this by saying that the poorest half of pensioners don’t pay income tax anyway, so this will hit the wealthier ones. It’s worth
remembering that pensioners have also been the main victims of QE — both by the inflation it stokes, and by its effect of lowering interest rates. This has heavily hit annuities. The below
table shows how pensioners have already been hit:

3. The 45p tax fiddle. The decision to go to a 45p tax rather than a 40p one was political, not economic. George Osborne wanted to go to 40p and was willing to strike a deal in
exchange for a mansion tax. But Cameron didn’t want to do that deal, and vetoed Osborne (this is quite rare). Fair enough. But the Treasury magically came up with a graph suggesting that the
optimal rate of high tax is between 45p and 50p. This is, of course, nonsense. Does anyone doubt that if Cameron had gone for a 40p tax, those HMRC figures would have showed that 40p is actually
the best rate? You can fiddle this graph by choosing how responsive the rich are to high taxes: the so-called Tax Income Elasticity. This is between 0 and 1. To justify 45p, the Treasury went for
0.45 — replacing Brown’s mendacious 0.35 used to justify 50p. But even this 0.45 is based on behavioral data from the late 1980s. So we’re now working on the rather strange idea
that the poor, and their money, have become more mobile since then. You can bet that the real figure is way higher. It was brave of Osborne to get rid of the 50p tax, and he deserves credit for
this. But I was against the 45p tax when first proposed for exactly the same reasons: it raises no revenue (above 40p), even the IFS acknowledged that. And it remains a symbol of Brown’s enduring
legacy over this government.

4. Spending untouched. The last few months have been about taxes, and the idea that every tax cut needs to be offset by a tax rise. The idea of funding tax by a spending cut was
ruled out of bounds. The below graph shows how Britain’s very high government spending is remaining just as high. I’m not quite sure why totemic importance has been placed on not
‘reopening the spending envelope’ — high spending levels are sacrosanct but deficit reduction is apparently not. This can’t be right. The Budget shows the deficit will be
halved over five years — Darling wanted to do it in four. The below graph shows Osborne’s plans for debt, versus the Labour plans he attacked at the last election. They are now, in
effect, identical.  


5. Osborne ought not to talk about ‘cutting the debt’ when he’s increasing it by the fastest rate in Europe. A recent poll showed that just 9 per cent of UK
voters realise that national debt is going up — no wonder, when even the Chancellor says ‘cut the debt’ when he means cut the deficit. I had thought Osborne had mis-spoke the
first time he did this, but when he made this slip twice in the Budget speech it seemed to be more deliberate. Maybe he is referring to paying one loan, even though he’s taking out even more.
But there’s still no excuse. We all know about using your Amex to pay off your Visa card.

6. Nor should Osborne boast about low gilt rates. He presented low gilts as being a standing ovation from the markets — when, in fact, this is the result of his QE. And a
very weird QE, one that only buys government debt notes (the American QE buys corporate debt). The Bank of England estimates that QE artificially lowers rates by 1 percentage point. A small point,
but it’s simply dishonest of Osborne to try to present this as something it’s not. There is something depressingly circular about this: Mervyn King artificially lowers rates, so Osborne
pays less in debt interest. He uses this to give a tax cut to people. But these people are facing higher shopping costs, due to the inflation exacerbated by QE. Osborne is lucky QE is generally
seen as a subject too boring to be analysed.

7. Afghanistan: a retreat dividend. Now that we’re leaving Helmand earlier, some £2.4 billion spread over three years has been written back into the accounts,
deducted from the reserve.

8. Another bank raid. I’m not quite sure why banks should be punished, to make sure they don’t benefit from the corporation tax cut. This is, I think, the third
time Osborne has increased the bank levy. And there’s another £330 expected from North Sea Oil. Not a tax, the Treasury says, but the fruits of additional predicted investment due to giving
certainty on decommissioning costs.

9. A tax cut: thank you, Danny. It would be churlish for a Conservative not to acknowledge that the tax cut for the low paid is only the result of a coalition. The Tory high
command has been allergic to tax cuts, but the Lib Dems wanted to push them through as a political priority. Yes, many Tories want them too — Michael Forsyth’s tax commission proposed
raising the limit back in 2005. But it was Lib Dems in the government that made it the case. The 40p tax band is lowered, to neutralise the effect of the raised threshold for higher earners. But no
one will be worse off as a result.

10. But let’s get this tax cut in perspective. The figure Osborne used for this tax cut was £220 a year. But don’t expect people to spend it all at once. The same
familes are each £1,000 a year worse off due to Britain having suffered the highest inflation in the Western world, stoked by the QE. Much of this inflation would have happened anyway, but
Bank of England figures estimate that QE added up to 1.5 percentage points on inflation.

11. The Royal Mail pension trick. By taking over the Royal Mail pension scheme, bagging the assets but not accounting for the liabilities, Osborne has managed to artificially
reduce the debt by £23 billion. This is a fiddle. Even Brown always provided debt figures net of financial transactions (RBS etc). But even then, debt is higher – as a per cent of GDP
– than Labour’s plans:

12. Child Benefit: a new trap. Osborne’s decision to remove the cliff-edge means a £50k limit, beneath which everyone can keep their child benefit. It’s tapered
away to £60k, so no one loses out by taking a pay increase. But this, of course, creates its own complications. Parents who do take pay increases will face different marginal rates of tax.
Ian Mulheirn from the Social Market Foundation reckons it’s 11 per cent for one child; 17 per cent for two children; and 24 per cent for three children.

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  • daniel maris

    Meanwhile in the real economy, on the high street, demand is in free fall. Sales were down 0.8% in February.

    The economy can only be flat lining.

    And Osborne has a lot to do with this, sending economic shivers down everyone’s spine and nailing down public sector pay – being held at 0% for the third year (an effective annual pay cut of about 3-4%).

    He has been sucking demand out of the economy and we are seeing the results.

  • PaulS

    I just can’t believe the focus on whether the reduction of the higher rate income tax rate will lose the government revenue of between £3 billion or £100 million in a year, when the government is borrowing £10 billion a month just to balance the books.

    Why is the BBC, in particular, so keen to guide us all into economic illiteracy?

  • PeterA5145

    It’s not true that nobody will be worse off from the changes in tax bands, as the higher-rate threshold is being reduced to offset the rise in the tax-free band, in a way that does not take any account of inflation. Thus higher-rate taxpayers become victims of fiscal drag.

  • Unfairness Unadddressed

    Child raising wife, earns nothing, unused taxcode, 2 children. Hardworking husband, gets a bit more than 60K.Commutes to London. Pays fortune for fuel.Gets back after bedtime, leaves before breakfast.
    Child benefit – gone.

    Live next door to couple who both earn 45K as civil servants, thats 90K total Mr Chancellor, 2 children driving about 5 minutes to work at 0900. Child benefit – intact.

    Result – I’m not voting Tory, plenty more of me but obviously not enough for them to care about.I look forward to all your snide comments.

  • Tiberius

    Fraser, judging by the screeching from Labour, and James’ reports that the LibDems and the Tory backbenchers are happy, Osborne has done at least okay considering the stage the coalition is at.

  • Hugh

    A budget for UKIP

  • Fraser Nelson

    Tiberius – as ever, you pricked my conscience.

  • Matt

    I might be naive but my hope is that the reduction to 45% will produce tangible evidence that even the most cloth-eared leftist cannot dispute that the Laffer curve is a reality and that he will then be able to justify dropping the rate further to 40% without too much political fallout.

  • Frank P

    And overseas aid?

  • Steve Patriarca

    I guess it is the Government’s sustained attack on pensionerr which comes to the fore. There are a lot of them and they traditionally voted Conservative. This is a young and inexperienced Government and a cabinet of boys are unable to understand. If pensioners were not also hit by the public disgrace of care homes, the scandal of impossible-to-access Conitinuing Care, the crazy interest rates and hence impossible annuities rates, then this step might be passed over. As it stands it is part of a general philosiophy to attack the prudent, penalise savers and reward the irresponsible—whatever this Government is it is not Conservative.

  • MikeWood

    At the time of the 2009 Budget, the IFS estimated tax income elasticity to be .46 – so much closer to Osborne’s .45 than Brown/Darling’s .35
    Interestingly, in 2009, the Treasury put TIE at .4 but were obviously told to go back and find a way of calculating it at .35

  • Tiberius

    So ten became twelve! One step more than the Almighty managed when he replaced Judas Iscariot.

  • Cityboozer

    There aren’t any integers between zero and one.

  • Widmerpool

    The undercurrent between the Chancellor ad the Business Secretary very noticeable. A lot of business initiatives but not many plaudits for Vince? George seemed to have more praise for Hesser than the Business Sec.

    Why was’nt Cable on the Govt Front Benches? Standing by the exit by the Speaker does that tell us something? Vince may have survived the Ides of March but…

  • Cogito Ergosum

    As ever, another Bodge-it.

  • Jennifer

    An integer between 0 and 1 eh? Definition of an integer anyone 😉

  • Fish

    I’m not sure how relevant it is to continue to compare where we are now with Darling’s defecit reduction plan. Ball’s may like to so, having the ‘luxury’ of not needing to impact that plan against what has happened to the world economy (particularly the EZ) over the past two years.

    With regard to the Age Related Personal Allowance – this is already tapered on income over £24,000 and currently disappears altogether at around £28,000. Losers will surely be compensated by the new, significantly increased, higher personal allowance and the siginifcantincrease in the state pension (although the SSP withdrawal needs to be understood.

  • Rich

    ‘This is an integer between 0 and 1′

    You may want to check the definition of an integer.

  • Sean O’Hare

    We all know about using your Amex to pay off your Visa card

    Bad example. American Express get very shirty if you fail to pay up in full within a few days of them sending you the account.

  • Daniel

    As a pensioner, I am delighted to know that the freezing of my age related allowance will help to finance a reduction in Lord Snooty’s tax.

  • RKing

    Did you know that pensioners have their allowance reduced by £1 for every £2 they earn over a certain figure thus making the actual tax rate equal to 34p in the pound.
    A bad way to treat us and one which I think they will live to regret.
    Is it true that if I was of working age living on benefits I would not have to pay any tax?

    Says it all really!!

    UKIP here we come!!

  • Tom Pride

    Did you notice that the 20% tax band will be reduced from £34,370 to £32,245 (over £2,000) to ensure that higher rate (40%) tax payers don’t get the full benefit of the increase in the personal allowance to £9,205 in 2013/14?

    Earn £41,450 a year and be classified as rich enough to pay the higher rate. Earn £60,000 and lose your child benefits. Earn £100,00 and lose your personal allowance with a £62% marginal rate. Be a pensioner and see your age allowance frozen. Earn £150,000 plus and get the real deal, cash in the hand, tax cut – just don’t move house.

    Talk about clobbering your own – the squeezed middle. Still great news for basement diggers and roof converters in London, but, is it bye, bye HSBC and Barclays?

  • Tiberius

    If Osborne was as reckless with the public finances as Brown, and unconcerned with winning the next election, he could make everyone happy with his budgets. But, Fraser, as you wrote before the general election, Brown had written Osborne’s early budgets for him.

    And just as you note Osborne omits QE from his speech, I note you miss child benefit from your piece. You berated him for the original measure. I predicted he would address the “fall over the cliff”, and he has. I’d say many other anomalies will also be addressed over time – the plight of pensioners, perhaps.

    I think when the hyperbole has died down, this will be seen as a good budget.

  • telemachus’

    Increase in bank levy-nice

  • The Boy Who Cried Wolf

    Much to applaud, Fraser? Well who is doing the applauding on this site, pray tell?

    Changing the subject a tad, I thought Miliband’s response was beyond parody, it was incredibly embarrassing, and some of the most obvious and desperate techniques were over-used like even he has never over-used them before. Completely ignoring the analysis of the independent OBR, his ideologically driven drivel and childish games made me pity him like you’d not think possible for a viable opposition leader. Someone put him out of his misery and get him out of there, he’s cried wolf too many times, but then he has nothing else to say. ‘Same old Tories’? Same tired old desperate story flying in the face of facts to the contrary. I almost had to turn it off it was so painful.

  • MikeTV

    A thoroughly dreadful budget in almost every way. Not remotely Conservative. Shows zero imagination, zero bravery. Gutless. Whilst feeling much contempt for Cameron for being a closet LimpDim, I used to have some reasonable regard for Osborne. No longer.

  • TomTom

    Only in Britain does the Budget have this theatricality. Other countries seem sober and less prone to hyperbole. The Budget is like some School Debating Club hosting a drinks party rather than seriously addressing the largest macroeconomic player in the economy.

    The National Debt marches inexorably onwards and Debt Interest will be the biggest item of expenditure if the rest of the world recovers and interest rates rise.

    They have increased public spending with increased tuition fees, it will explode with NHS Changes, and when the Banks start buckling after Spain collapses – well, best laid plans of mice and men.

    There is nothing a Budget can do when the disaster is so huge

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