Thoughts on politics and life from a liberal perspective

Tuesday, 22 June 2010

Budget 2010 - painful but necessary

So we now know following George Osborne's first budget today what measures are going to be taken over the next few years to get the deficit under control.

I have picked out some of the main points along with my thoughts below:

  • VAT up to 20%. As I have repeatedly stated on here I would have preferred income tax to go up rather than VAT as at least that is clear and based on ability to pay. VAT is a stealth tax and by some measures is regressive. But governments hate putting up income tax (because the public hates it whatever they might say to pollsters, punishes politicians that do it and we do live in a democracy). The £13 billion it raises is necessary unless the cuts were to go even deeper which would surely have been politically impossible and caused even greater howls from the opposition.
  • Income tax allowance threshold to increase by £1,000. I am very much in favour of this and it moves us towards the Lib Dem policy of having everyone who earns under £10,000 taken out of income tax altogether. I have had arguments with numerous left wingers on Twitter about this who keep saying that it does nothing to help the poorest in society. I know. It's not designed to. It's an income tax measure and the poorest in society do not pay income tax. What it does do it allow the lowest earners to keep more of their own money which I see as a very good thing.
  • Capital Gains tax threshold up to 28% for higher rate tax payers, kept at 18% for lower rate tax payers. I would have preferred to see this go closer to 40% to completely close the gap with the higher rate of tax but I understand that this is a compromise.
  • Corporation tax for large companies to come down from 28% to 24% in 1% decrements over the next 4 years. Corporation tax for small companies to come down from 21% to 20% next year with no further reductions scheduled. First, declaration of interest, I own and run a small business. Whilst I am pleased to see corporation tax coming down (this will encourage growth which will help us get out of the fiscal problems faster) I think the balance should have been reversed with the small companies rate coming down more quickly. This is not from a self-motivated perspective but because small companies are the engine of the economy and the less tax they pay, the more likely they are to grow and ultimately also become the large companies that pay the higher tax ultimately anyway.
  • Levy of £2 billion on banks. I would have liked this to be higher.
  • Accelerating the change in retirement age to 66. A necessary move. The sooner politicians are honest about this the better. We cannot continue to subsidise retirements of 20 or more years as the norm. Pensions were never intended to do this and the next generation cannot afford to do it.
  • Child benefit frozen for 3 years. I would much rather have seen it means tested although some say it would have been expensive to administer this. I am not convinced this would make it unworkable though. I expect Labour to go for the government's throat on this and it is harder to justify than means testing.
  • Tax credits reduced for families earning over £40K per year. I have no problem with this. The money needs to come from somewhere and this is one example of where those earning a bit more have to contribute.

There are lots of other measures but I think these are the main ones. Overall it is not a nice budget and there is lots of pain. However I totally agree with Osborne's comments that the government has been forced into this position. I think Harriet Harman actually made a good impassioned contribution from the dispatch box in response in terms of performance but there is no narrative from Labour about what they would have cut differently. They just seem to oppose everything and as a result lack credibility. They should also display more humility about why we are in this situation in the first place.

At the end of his statement, Osborne claimed that the Treasury has analysed the changes and calculated that the poorest are least affected and the richest most affected. I expect to see lots of alternative analysis from left wing blogs in the next few days telling us why they think this is wrong.

I think however that particular argument goes, the pain is necessary to get our finances back on track. Hopefully as the economy grows in the next few years some of the pain can be mitgated.


asquith said...

I would not have supported means-testing child benefit, it should imho be universal because of the administration, but even more so because of the perverse incentives. The last government, I accuse of having de facto encouraged people to stay poor with their battery of benefits "targeted" towards people right at the bottom. So I agree with the coalition's stance rather than yours.

I have in fact said that I consider myself to be left-wing, & think economic libralism can be reconciled with this. Because what we are doing now is encouraging people to work & imrpove their own lot in life. With this national insurance holiday & corporation tax, the cancellation of the planned rise in NI, & so on, we might finally attract businesses to blighted areas like this.

It WOULD help people on benefits if the entry into work was made easier, as it has been. As for attracting jobs I do, in general, take the view that it is more a case of removing obstacles than of the state offering incentives (beyond state education, a friendly tax regime, etc).

That is why unlike many I also support having a national minimum wage. It sends out a signal that people's efforts will produce a certain reward, which will of course make them less likely to claim means-tested benefits. Maybe not a good theory but it does work in practice in this city & elsewhere.

I am not a supporter of most of the welfare "reform" proposals of this government or its predecessor (which are very similar, of course)because I think most jobless & disabled people are genuine, some are capable of some form of work but not without extensive help while with others it might be best for them to stay on benefits because it just isn't plausible for them to get jobs (although they could make good volunteers & may find this a road to employment).

Glad also that Ozzy went through with CGT. It could easily have been a victim of his attempts to satisfy right-whingers.

asquith said...

Returning to what I wrote in the first paragraph. Poorer families & old-timers are the groups who are most discouraged from saving & making provision for themselves by the means-testing regime. It must really piss old fuckers off if, having exercised their right to buy & done everything right, their reward is to have various kinds of state support withdrawn from them that their less provident neighbours.

PS- I am on less than £20,000. I'll be gaining from this income tax cut then. As you say it's only the Liberal Democrat members of the coalition who have brought about this, CGT & other shite a Conservative majority would not have done.

oneexwidow said...

Just posted what has turned out to be a pretty similar post, even though I deliberately didn't read any other comment before composing!!

nonny mouse said...

>>I think the balance should have been reversed with the small companies rate coming down more quickly.

As another small businessman my instincts are the same as yours. However, I think I see where they are coming from.

I watched some of the followup speeches after the budget. The point was made that medium sized business are better placed to export our way out of our problems. Also, cutting tax is more about encouraging investment than letting us keep more money. As such, they are going after inward investment rather than ecouraging people to start small businesses.

Personally, I'm much more excited about the temporary NI cuts for new businesses, assuming you live outside the south and east.