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CEE's budget insight
A quick examination of the 2012 budget
Taking a step back from the detail of the budget it is perhaps worth looking at what it affirmed or changed in the bigger picture of the UK economy and public finances.
The answer is relatively little – as one Tory MP described it, this was a reaffirmation of Plan A. Whereas some on the left have been arguing for more direct short-term economic stimulus to kick start the economy, through significant tax cuts (Labour VAT) or more direct government investment on infrastructure projects to boost job creation, the budget maintained fiscal neutrality. Meaning if some groups benefited others paid for it. And despite some attempts to put more money in people’s pockets, the budget maintained the Government’s focus on boosting businesses’ ability to produce, rather than consumers’ ability to purchase or directly creating jobs, hence the Chancellor’s desire to rapidly increase exports to £1trillion as the route to growth.
However, the Chancellor did receive some good news as the Office of Budget Responsibility (OBR) revised up its growth forecasts from 0.7% to 0.8% this year and to 2% and then 2.7% for 2013 and 14. However, with the on-going European crisis and the number of times the OBR has significantly changed its mind, who really knows what lies ahead. In addition these figures are still very anaemic, we appear to have just gotten used to them. Borrowing also appears to be on a downward path, but this is mostly due to increased cuts as opposed to a growing tax take.
Different political parties have been putting a different spin on the budget. For the Liberal Democrats this was a budget about lifting low and middle income earners out of paying tax whilst making the rich pay more; for the Conservatives it was about making work pay and rebalancing the economy and for Labour it was a ‘millionaires’ budget’.
The lofty heights and the squeezed middle
The Budget outlined that the Government will increase the personal allowance of income tax by a further £1,100 in April 2013, taking it to £9,205, making 24million people £220 better off a year. This will be welcomed by householders but in light of current inflation levels and the planned increases in fuel duty, the stimulus impact it will have on the wider economy and how much people feel the benefit in their pockets, is unclear. Additionally those on medium and low incomes are still suffering from reductions in working tax credits announced in the 2010 budget, so while this is welcome it is unlikely to have a dramatic effect.
The Government also controversially announced that it will reduce the top rate of income tax from 50 per cent to 45 per cent from April 2013 for those earning over £150,000, with the Chancellor stating that the rate of 50p was having a distorting effect on tax avoidance. Whilst many will argue this is a weak reason to reduce the level, the Chancellor remained adamant amidst considerable criticism from Labour. The Chancellor will no doubt refer them to additional measures he claims will result in the rich paying significantly more than any other group, for example a cap on income tax relief to 25% of income which will potentially affect such investments as enterprise investment schemes and charitable donations.
Additionally the Chancellor announced a levy of 15% on homes worth over £2million bought by companies, clamping down on stamp duty avoidance and a 7% stamp duty imposed on the sale of all homes worth more than £2million and 5% for those over £1million.
There has been considerable consternation amongst the media concerning the so called ‘granny tax’, which will see age related Personal Allowance of income tax paid on your pension frozen and eventually brought into line with the under 65 allowance. The policy which will raise £3.3bn a year has been criticised as a raid on pensions by some, but others have pointed out that to date pensioners have survived relatively unscathed, in the ‘age of austerity’.
The prickly issue for the Government of the Child Benefit qualification threshold has been dealt with by abolishing it for those with an income above £60,000 per year and incrementally reducing it for taxpayers with income between £50 and £60 thousand per year, with effect from 7 January 2013.
A positive in the small print saw a change of mind on the rules due to come into effect from April, which required couples with disabled children to increase their working hours from 16 to 24 to continue to receive Working Tax Credits. But regulations published yesterday say that a couple will continue to receive Working Tax Credits so long as one partner works 16 hours a week and their partner is entitled to Carer’s Allowance.
The squashed bottom
The Chancellor stated that if we are to maintain our current deficit reduction plan, cuts in social security will have to increase by a further £10bn, on top of the already announced £18bn. Where the axe will fall between pensions and welfare is unclear. However, it is worth noting that there was nothing in the headlines of the budget to further help those on welfare into work, or to directly create jobs that people coming out of welfare might benefit from.
It is also worth noting that the day before the budget, the Coalition agreed to freeze the minimum wage below inflation on the recommendation of the Low Pay Commission, whilst announcing thousands of pounds of tax breaks for the highest earners. Whilst the Low Pay Commission cited a needed balance between wage levels and job creation and retention, it is notable that issues of corporate responsibility, short termism versus long term returns and investment of record business surpluses back into the economy were not addressed in the budget.
There is a feeling that those at the bottom of the pile were largely passed over in this budget, with the threat of further cuts to come hanging over their heads, and with no immediate significant growth in the economy, leaving limited room to manoeuvre out of poverty.
The headline was the reduction in corporation tax by an additional one per cent in April 2012 with a view to reducing it to 22 per cent by April 2014. There was also an announcement that new cash basis for calculating tax for small unincorporated business will be introduced, which will reduce the time it takes for these businesses to calculate their tax, however, there is limited detail on this proposal.
Other initiatives see the development of a national roads strategy and an examination of new ownership and financing models, which could see the widespread introduction of toll roads in the UK. £100million investment to create 10 super connected cities was confirmed and a package of oil and gas tax measures was announced ‘to ensure billions of pounds of additional investment in the UK Continental Shelf’.
In general it appears the business community have been underwhelmed by the budget, whilst welcoming many of the individual announcements, in its totality it could have gone further.
The reaction to the budget in Northern Ireland has been mixed in Northern Ireland, but overall it has been generally muted.
Treasury figures show that the increase in the personal allowance will lift 25,000 people here out of income tax and benefit, 605,000 people in total.
The investment of up to £13.7million in Belfast to deliver ultra-fast broadband has been welcomed, but may cause disgruntled rumblings beyond the city.
A delay in plans to increase the aggregate levy rate will be welcomed by the construction industry and considered a victory in its longstanding campaign to address the anomaly created by the border with the Republic of Ireland, where the levy does not exist.
Corporation tax reliefs for high-end television industry will be a boost to the booming sector which has already received considerable support from the Northern Ireland Executive.
The reduction in UK headline corporation tax will reduce the potential cost of any reduction in Northern Ireland; however, no commitment was made by the Chancellor on this issue. The potential for creating a Northern Ireland Enterprise Zone was mentioned however, this seems to be in the hands of the Executive which has been lukewarm on developing the issue to date.
The two issues that caused the biggest negative reaction was the announcement to continue with planned fuel duty rises, which will put extra pressure on households and businesses which are already facing the highest fuel costs in Europe, and the Chancellor’s announcement to push ahead with planning to regionalise public sector pay.
The Chancellor’s argument reflects his overall approach to the economy, which suggests that we need to give the private sector room to grow. In regions such as Northern Ireland, where average public sector pay is higher than average private sector pay, this, according to the argument, is stunting private sector growth as talent is attracted to the public sector. This is contrasted with the view that Sammy Wilson appears to support, which suggests that public sector wages are a significant driver in our local economy and private sector, and to remove them would depress economic activity further and actually damage the private sector. Placed with the direction of travel of the overall budget, it seems that the Chancellor is very serious about implementing this policy.
The voluntary and Community Sector
Again this budget largely passed over the sector, however, some issues did come out in the small print. Two of the main issues included the considerable concern regarding the impact capping income tax relief will have on charitable giving. In a period of reducing government support, further squeezing charitable donations could have a significant impact on the positive work charities do. Although the Government did say in the small print that it will work with philanthropists to ensure this measure will not impact significantly on charities that depend on large donations, this is unlikely to reduce concern.
On a more positive note charities which want to collaborate on service provision will be allowed to share their VAT costs in a sharing exemption announced in the Budget.
The document reaffirmed a number of announcements made in the 2011 budget surrounding inheritance tax, Self Assesment Donate for tax returns and the Gift Aid Small donations scheme.
Additional proposals include the Government’s proposal to legislate to amend Community Amateur Sports Club scheme and Gift Aid legislation to ensure it operates as originally intended and to put on a statutory footing the practice by certain charities and CASCs of making claims for repayment of income tax including Gift Aid outside a tax return.
The Government will make £20 million available to the not-for-profit advice sector in 2013-14, and again in 2014-15 and the Government will withdraw charitable buildings from the scope of the VAT reduced rate for the supply and installation of energy-saving materials.
For social enterprise HM Treasury will also conduct an internal review looking into the financial barriers to social enterprise, and the Government will launch sector-based reviews of regulation to ensure it is enforced at the lowest possible cost to business, starting with volunteer events (and 2 other areas).