Revenge of trickledown economics
George Osborne's budget shows that we are not 'all in it together', writes Eddie Ford
Budgets ain’t what they used to be. Once upon a time the chancellor and his colleagues were expected to maintain a state of strict purdah. Every chance meeting between a treasury official and a journalist had to be formally reported during the weeks before the statement. Hugh Dalton, the Labour chancellor, was forced to resign in 1947 because, whilst walking to the House of Commons to give the autumn budget address, he made an off-the-cuff remark to a journalist hinting at some of the tax changes to be made - which were then printed in the early edition of the evening papers before he even had time to complete his speech and while the stock markets were still open. Scandal. Dalton resigned.
Whether sadly or not, those days are almost certainly long gone. Pre-budget leaking is now a long established political pastime, almost an obligatory ritual. This year though the numbers of leaks was unprecedented. But the reason for that is fairly obvious: the scramble for credit within the coalition government, as Liberal Democrats and Tories both try to show their supporters they are fighting their corners. The Liberal Democrats want to prove that they are not Tories and the Tories want to prove that they are not Liberal Democrats. Also, when it comes to anything that might potentially impact upon the wealthy, the Tories find leaking a useful way of discovering what their backers think - not least those individuals who donate so generously to the Conservative Party.
George Osborne’s budget was essentially one for the wealthy - hardly astonishing, given that over 20 cabinet members are millionaires. The basic assumption was that those at the top of society are the wealth-creators and hence need to be incentivised - lots of carrots - to encourage them to create yet more ‘wealth’ (ie, make larger profits and grow even richer). Given this grotesque premise, tax cuts - personal and corporate - are a vital necessity if we are to unleash a wave of entrepreneurship that will in turn create jobs for those languishing at the bottom.
Meanwhile, the working class and the poor find themselves at the wrong end of below-inflation increases to the minimum wage, less generous tax credits, regional differentials in public sector pay, and so on. In other words, the budget saw the unwelcome return - or revenge - of trickle-down economics. Not that it had ever gone away, of course.
The budget flagship, at least for the Tories, was the reduction in the top-rate of tax from 50p to 45p - so party time for Britain’s richest 300,000 households. Indeed, it would have been further reduced to 40p if Osborne had got his way - he told the treasury select committee on March 27 that he had not assigned a “special status” to the 45p rate, which would be kept under “review”. But the idea was blocked by David Cameron and Nick Clegg, the latter saying he would only accept a 40p rate if a ‘mansion tax’ on properties worth more than £2 million was introduced - something rejected out of hand by the prime minister. Cameron likes to look after his buddies.
Osborne disingenuously argued that the 50p rate had “distorted” the economy by “encouraging” tax avoidance. Presumably the poor, downtrodden super-rich had no choice but to employ armies of extremely well remunerated accountants and financial advisers to exploit every tax loophole (but it hurt them to do so). Osborne surely missed an opportunity to develop this logic to its fullest extent and declare that from now onwards the rich would not have to pay any income tax at all. That way, no more ‘distortions’ would be introduced into the economy and the rich could finally enjoy guilt-free sleep.
Cutting the top rate of tax down to 45p, Osborne argued, would only cost the exchequer £100 million - given that the current rate “raises at most a fraction of what we were told” and, in fact, “may raise nothing at all”. But a recent HMRC report he referenced indicated that the 50p tax rate raised £1 billion in its first year (2010-11) - far less than the £2.6 billion originally predicted, admittedly, but this was mainly due to people ‘forestalling’; that is, being paid early ahead of the introduction of the 50p rate in April 2010 in order to avoid paying it. But “nothing at all”?
Further defending top-rate reduction before the treasury select committee, Osborne posited that “dynamic modelling” suggested the 45p rate was likely to lead to a smaller loss of revenue than retaining the current rate. His calculation is based on the economic model known as the Laffer Curve, which hypothesises that under a 0% rate no tax is paid and at 100% no tax is paid either because no-one will bother working: therefore the trick is to locate a midway point that will optimise income.
According to basic arithmetic, the cost of cutting the top rate will be £3 billion in the first year, rising to £4 billion by 2016-17. But Osborne would have us believe that the net cost would fall to just £100 million or so thanks to the extra revenue from wealthier people working harder and harder - by the sweat of their brow - and gratefully bringing ‘home’ their monies stashed away offshore now that we have a “competitive top rate of tax”. Voodoo economics, UK-style. Straining credibility even further, Osborne asserted that, taking into account such calculations, the rich (people like himself, for instance) would end up paying five times more tax as a result of all the measures taken in the budget. Naturally, the chancellor said that his budget was “unashamedly” pro-business and would help the country “earn its way in the world”.
Another major plank of the budget was the imposition of a 7% stamp duty on properties worth more than £2 million - with immediate effect. Currently the tax is levied at 5% for all properties over £1million. Additionally, the duty on residential properties over £2 million which were purchased via an offshore company would increase from a paltry 0.5% to 15% - leading some to describe it, approvingly or not, as a “workable” mansion tax. Yet, obviously, this new rate would only affect a small number of properties, owned by the likes of Sir Mick Jagger and Ringo Starr - or Russian oligarchs.
For example, the latest statistics from the Land Registry showed that in November 2011 there were 121 homes sold for more than £2 million in England and Wales - accounting for just 0.2% of the 57,967 homes sold that month. Under the current system, if all those people paid stamp duty - a highly unlikely eventuality - it would raise £142.2 million. At 7% it would raise to £198.8 million, an additional £56.8 million. Not exactly staggering amounts of money. In reality, it is extremely doubtful whether the treasury will be able to collect the extra stamp duty from the Russian oligarchs, oil sheikhs, bankers, private consultants, rock stars Hollywood actors, footballers, etc - famous for their creativity when it comes to avoiding tax.
And, of course, what the chancellor takes from the rich with one hand he gives back with another. Hence on page 63 of the red book he sneaked in an inheritance tax exemption for non-domiciled individuals. Presently, a taxpayer domiciled in the UK can transfer their entire £325,000 inheritance tax allowance to their spouse if they are also based in Britain. This figure is reduced to £55,000 if a UK taxpayer makes a transfer to a spouse who is not domiciled in the UK. Osborne said he would increase this, though has so far declined to set a figure.
Just about the biggest budget fuss has been over the so-called ‘granny tax’. Citing the need to “simplify” pensions, Osborne intends to freeze age-related allowances (ie, the amount of income that is tax-free) for half of Britain’s pensioners by the end of the parliament. The treasury says this will bring an extra 230,000 into the income tax system, saving the government £1 billion by 2015.
Currently, the allowance is £8,105 for those under 65 (changing to £9,205 in the 2013-14 financial year), £10,500 for those aged 65 to 74, and £10,660 for those aged 75 and over. However, this ‘extra’ allowance is gradually withdrawn from those pensioners with a taxable income of between £24,000 and £29,000 - about 10% of all pensioners - and anyone with an income of more than £100,000 has all their personal allowance gradually withdrawn regardless of age.
Practically meaning that from now on anyone turning 65 after April 5 2013 will get the same personal allowance as the under-65s, but someone who turns 65 just before the same date will still get the £10,500 personal allowance. As for people on the basic state pension and pension credit (some 50% of all pensioners), they do not earn enough to pay income tax, so will be unaffected by the changes. They constitute about 50% of pensioners. Therefore that leaves a middle stratum of pensioners whose income is likely to be made up of a combination of state and private pensions, as well as some money in savings accounts - the near mythological decent, hard-working, ‘responsible’ pensioners who have ‘done the right thing’ all their lives. Prudently saved a bit each month and loyally voted Tory each election - possibly. This large grouping might well feel the tax goalposts have suddenly been moved, leaving them with less than they might have expected. The treasury’s own statistics show that, taking inflation into account, Osborne’s measures will leave 4.41 million people worse off by an average of £83 a year come 2013-14.
Under the budget we can see that we are not “all in this together” - always a cynical lie. While the top 10% of earners and the super-rich with their Mayfair pads will certainly gain, the poorest will lose the most. A living insult to the unemployed, disabled, poor pensioners and the 200,000 part-time workers, who are having their tax credits snatched away this April. That is when the qualification threshold is raised from 16 hours to 24 hours - at a time when the bosses are slashing employees’ hours due to the economic environment. Resulting in a grim situation where low-income families with parents in part-time work, more often than not because they could not find full-time employment, could lose nearly £4,000 per year. How are they in the same boat as Elton John or, for that matter, everyone sat round the cabinet table?
The entire budget is a monument to the government’s blatant failure to deliver its central promise. The coalition commitment to getting rid of the deficit within its first term was premised on a 2%-3% growth rate, but that now looks like a fantasy figure. The recession in the US and Europe, combined with the government’s own suicidal austerity programme, has seen government spending increase, as it forks out ever more money in the form of unemployment benefit, housing benefit, etc (even after the cuts in these areas).
Bluntly, it is almost a statistical fluke that the UK is not technically in recession. Outside of Osborne’s fiscal Alice in Wonderland, the prospects for the economy are bleak - something confirmed by figures published by the Office for National Statistics on March 28. The economy contracted by 0.3% between October and December last year, more than the 0.2% drop previously estimated by the ONS and other economists. That left growth for the year as a whole at just 0.7% - down on the 0.8% originally pencilled in. Furthermore, the ONS said real household disposable incomes in 2011 as a whole fell 1.2%, the biggest drop since 1977.
Not exactly a sign of roaring success, George.