What the emergency Budget means for you
By
MoneyWeek editor-in-chief
Merryn Somerset Webb Jun 22, 2010
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Harriet Harman worked herself into a total frenzy after George Osborne sat down after his budget today. But interestingly, she couldn't find much in the way of specifics to have a go at. Instead she had to call it "reckless" and bad for the economy (though it would be hard to find much worse for the economy than an unsustainable deficit) and then shout a few nasty things about the Lib Dems betraying their pre-election promises.
Her problem when she stood up was simple: not only had Osborne taken the wind out of her sails rather with his announcement of the restoration of the earnings link to state pensions just before he sat down, but first impressions suggest it wasn't a bad budget all round. The spending cuts were no worse than expected. The public sector can't do much in the way of complaining, given that the two-year freeze on salaries doesn't apply to any genuine low earners (below £21,000 on today's definition) and that nothing nasty has actually happened to their pensions yet.
And the idea that people on disability benefit should have a medical assessment and that houses with four bedrooms rented for those on housing benefit shouldn't cost more than £400 a week doesn't seem unduly mean, particularly once you know that right now there are people getting up to £104,000 a year (a sum that takes the total income tax of 16 people on median incomes to pay).
The scaling down of tax credits is also hard to argue against given that there are 150,000 households earning over £50,000 getting some kind of benefit at the moment. That never seemed quite right. Freezing child benefit caused intakes of breath around the house but it isn't that big a deal. The better off don't need it (though Osborne is totally right in a way to keep giving it to us – it makes us feel that we get something back) and the poor will be compensated via the tax credit system for any fall in their total income.
Anyone arguing against this stuff will be doing so out of a warped sense of entitlement, rather than one of fairness. Of course, all these big fair-sounding announcements are just the beginning – Osborne made it clear that most departmental budgets are to be cut by 25% or so in the end: we'll find out later what gets cut to hit those targets. But I think that given spending cuts add up to a total of 77% of Osborne's deficit-cutting plans we can be sure that it's going to mean more than the odd pay freeze or cancellation of free swimming for old people.
The great uncertainty, as many are pointing out, is exactly how far the standard of public services will fall with the cuts. It is tempting, given the over-staffing and non-jobs endemic in the sector to think the answer is not very far at all. But we'll have to wait and see on that one.
On to the tax rises. The VAT rise was long anticipated and at least all the exemptions stand, something which should mean the poor aren't as badly hit as they would be otherwise: necessities won't change in price. We would have quite liked to have seen a higher rate on very luxury goods as an easy way of raising a little extra money – if you are buying a £60,000 car, what odds if your VAT is 20% or 25%?
But that's a minor gripe. On to capital gains. We were hoping for some kind of recognition that long-term investors should not be taxed on inflation. We didn't get it. On the other hand, the rate for higher-rate tax payers has only moved up to 28%. That's not high enough to make us angry, but it is probably high enough to stop people thinking too much about converting income into gains to avoid tax. It is also pretty simple and Osborne provided a nice rise in the entrepreneurs' exemption (to £5m, which should be enough to stop new entrepreneurs feeling discouraged). So that's OK.
We were also pleased to hear the Chancellor say that he intends to attempt to deal with the complications involved in Labour's plan to cut pension tax relief for high earners potentially "by reducing the annual allowance" instead. I wonder if he's been reading our blog (The UK's pension rules are too generous). Also excellent news was the announcement that the effective obligation for everyone to buy an annuity with their pension pot is to go – overpriced annuities are one of the main reasons why pension saving is less attractive than it should be.
Next up, the tax cuts. The cuts in corporation tax have to be seen as good news – our rates were getting far too high relative to the rest of the G20, and cutting them like this should mean that over time they bring in more, not less, to the Treasury. Then there was bringing a million odd people out of income tax altogether – you can't say that isn't "progressive."
But all that said, this was not a perfect budget. We were hoping for the wholesale rejection of the complicated tax credit system (even the list of reforms to it that Osborne suggested were utterly incomprehensible to the non-expert); more of a commitment to simple and flat taxes; or, best of all, something so brilliant the rest of us hadn't thought of it. We were disappointed.
We also wonder if, given some of the vagueness in the details (the bank levy for example), it will be seen as enough. For now the market seems to think that it all marks a serious attempt to deal with the deficit, and it hasn't instantly sparked the deflation scare we are expecting at some point soon: by mid-afternoon the pound had erased an earlier loss against the dollar and was up against the euro too. So that's OK too.
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Merryn Somerset Webb
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