Wednesday, March 21, 2007

A Good Budget for Gordon Brown... But...

Let's be clear. For the career of Gordon Brown this was a good budget. He threw some red meat to the left of the Labour Party by directing more money towards child benefit and tax credits, but then appeared to announce a tax cut. The truth, as ever, with Gordon Brown is somewhat more complicated.

I noticed that most of the sweeteners were to take effect from April 2008 while many of the tax rises were immediate. From what all the commentators are saying it seems that there is an overall rise in the tax take, especially for middle income families. These are the families who will vote to keep marginal Labour MPs in their seats or not. On the basis of what I have seen so far I think the likelihood is 'not'. However, there is a big 'BUT'. If they manage to spin this 2p off income tax as a real terms cut it will transform people's view of Brown from being a tax hiker to a tax cutter. If people ignore the bad effects of abolishing the 10p rate (which Brown himself introduced) and concentrate on the 2p cut he will have achieved his aim. One person commenting in the previous thread said "I have voted Conservative for nearly 25 years, but now see Brown as the tax-cutter." Quite an astonishing thing for a Conservative to say after Brown's 99 tax rises.

Opinion seems to be split on who is going to gain from these tax changes and who will lose out. It seems to me that people at the bottom of the income scale (under £18,000) will lose out but those who are earning £40-60k will also be hit by a big rise in National Insurance, which won't be totally offset by the increase in the threshold to £43,000. However, if the likes of the IFS are confused about the implications, don't blame me if I am too!

So my conclusion is this. In the short term this will be seen as a triumph for Gordon Brown personally and a further boost to his hopes of taking over from Tony Blair. But I think once the small print is read, many people, including Labour MPs, may come to revise that opinion.

Anyway, on 18 Doughty Street tonight we have three programmes looking at the economic and political consequences of the budget.

7-8pm Up Front Budget Special: Guests Nick Palmer MP (Lab), Mark Francois MP (Con, Treasury spokesman), Lord Newby (LibDem, Treasury spokesman)

8-9pm Your Money Special, concentrating on the tax changes

10-11pm Vox Politix with Warwick Lightfoot (Con, London Mayoral candidate and former Treasury Special Adviser), Andrew Constantine (Eng Dems, Tax adviser), Charles Miller (Public policy consultant) and Ashley Crossley (Con, tax barrister)


Chris Paul said...

That Politix Show looks like it will generate a rip-roaring "me too" of a debate. A bit like a Doughty PMQ review where everyone has to pretend to have mild differences when all three are raving Tory loons.

Anonymous said...

Look for an increase in NI contributions in the subsequent detailed budget proposals.

Give it away with one hand and take it back with another (stealth tax).

Anonymous said...

Also in the budget notes, look at the changes in the capital allowances rules, which increase company tax bills by more than the 2p rate cut reduces them.

Ibn Battuta said...

As far as I can see, the increase in NI contributions won't have much impact on the self-employed, which is very good news for high-earning partners in professional service firms.

The changes in capital allowances rules will probably kill off what's left of the leasing industry, but I wouldn't expect them generally to have a huge effect on most company tax bills.

Newmania said...

I don1t think it will take long Iain .. you forget the extent to which Labour are not trusted on tax. The cut on the basiuc rate lasted about a minute of thought in our office...really people aren`t thay stupid.

The ineresting thing here is the way you notice that he has to please the left . He does not have to room to change enough to get elected I `m sure the ciurrenbt polls are flattering but i cannot see a Labour Government

Richard Havers said...

Iain, one swallow etc and one tax cut doesn't make him a cutter. Of course we live in the era of spin and short-term attention spans for public and media alike but nothing, absolutely nothing can turn Broon into the person he would love us to believe he really is.

I've never seen Gordon as a great leader. It seems to me that he's spent most of his time stalking the shadows. Sure his record as the Iron Chancellor is in some respects impressive, but as anyone who's worked in business knows, a No.2 often finds it hard to step up to become leader.

I think it would be far more apposite to compare Brown to Machiavelli. Interestingly the Italian was eventually accused of conspiracy and arrested. On second thoughts I maybe muddling up my comparisons here.

Finally Gordon Brown needs to be careful for what he wishes for. In waiting so long for it methinks it will all go even more horribly wrong than some commentators have dared to anticipate.

Rush-is-Right said...

But I think once the small print is read, many people, including Labour MPs, may come to revise that opinion.

Isn't that always the way with Brown budgets? Even the Great Pensions Swindle was presented in the speech as a simple 'reform' of ACT, but it took two days of close study of the releases to work out the implications for pension fund tax credits.

bgprior said...

I'm not convinced this is bad for middle-income earners. It is worst for low-income earners (in the range £5-18k p.a.), who have seen their effective marginal rate of tax increased yet further by the increase in the withdrawal rate of Working Tax Credit, and also suffer disproportionately from the loss of the 10% starting rate. Middle-income earners above that level (£18k), by my calculations, gain more from the 2% cut in the basic rate than they lose from the abolition of the starting rate, and are not affected by the increase in the UEL for NI unless they earn over £33k. Above that level, they do less well again, until at around £38k they are very slightly worse off, but shortly after that, the increase in the threshold for the higher rate of income tax kicks in, and people are significantly better off. In fact those in the bracket £40-60k seem to me to be the group who have (proportionately) benefited the most from this budget.

Not that it's a good budget, but if those calculations are right (and like you say, it's not easy to be confident one has fully understood the changes, so I may well have got this wrong), I would say the problem with the budget, apart from the contemptible increase in the poverty trap for lower-income earners, is that it is not balanced, contrary to the publicity, and will increase inflationary pressure, leading to higher interest rates, which will take back any gains and more.

Anonymous said...

Richard Havers,
I think it would be far more apposite to compare Brown to Machiavelli. Interestingly the Italian was eventually accused of conspiracy and arrested. On second thoughts I maybe muddling up my comparisons here.

You are; the comparison for Brown would be with Ernest Honecker. (Machiavelli was brave and clever).

Anonymous said...

People who say that the Budget makes low-paid earners (i.e. those previously in the 10% income tax bracket) worse off are ignoring the effect of tax credits. Virtually everyone whose income fell entirely within the old 10% bracket would have been eligible for some sort of tax credit; taking into account these transfer payments, the bufget is broadly redistributive.

bgprior said...

Eddie, It is true that increased tax credits will compensate most low-earners for their increased tax bill (though some more than others), but my point was not the effect on their household budget, but the effect on their incentives. A withdrawal rate of 39% for WTC plus an income tax rate of 20% and a NI rate of 11% means that low earners face an effective marginal rate of taxation of 70%, even without taking into account the withdrawal of any other benefits. That's a deterioration of 12 percentage points (the loss of the 10% bracket plus the increase in the withdrawal rate by two percentage points), and rather contradicts Gordon's claim that tax credits are an incentive to work - quite the opposite. What Gordon has never understood is that extension of means-tested benefits increases the number of people trapped in poverty by disincentives to work. Hence a growing problem with a frustrated underclass who have little hope of working their way out of their situation.