John Humphrys discusses the reception of George Osborne's latest budget
George Osborne, the Chancellor of the Exchequer, may perhaps have been a little taken aback by the press coverage of his Budget. No doubt he expected Labour-supporting papers to attack him for his well-trailed decision to cut the top rate of income tax for the rich. But he will not have welcomed the headlines in the Tory press accusing him of clobbering pensioners to pay for it. Is that what his Budget adds up to? And is it justified, economically and politically?
There was a time when Budget decisions were top-secret until they were announced in the House of Commons. One chancellor even had to resign after dropping a hint to a journalist of what was to come as he walked into the chamber. But the dark arts of political spin put an end to ‘Budget purdah’ long ago and coalition government has turned the process of Budget decision-making into a semi-public activity in which the two parties in the government negotiate with each other, partly through the media.
Will the budget affect the rich?
We knew sometime before Mr Osborne delivered his speech that the most striking decision was that the rate of income tax to be levied on incomes over £150,000 a year would be reduced from 50% to 45% from next year with the hint that it might be lowered to 40% by the time of the next election. The 50% rate, introduced as a temporary measure by the last Labour government, had long been in Mr Osborne’s sights. He claimed it raised little revenue, that it discouraged wealth-creators and gave the wrong signal to foreign entrepreneurs considering setting up business here. Getting rid of it would also go down very well with the right wing of the Tory Party.
But he had to get the agreement of his Liberal Democrat partners in the coalition. If the top rate was to be cut, the LibDems wanted other compensatory tax increases on the rich so that they could say the rich were not being let off in a time of austerity. Various options were floated, including a mansion tax and a tycoon tax. In the end the two parties settled on a plan to close tax loopholes and increase stamp duty on the sale of houses worth over £2m to 7%.
The government claims that the rich will pay five times more through these tax-raising measures than they will gain through the cut in the top rate of income tax, but no one really knows. Sceptics argue that all chancellors claim they will raise money from closing loopholes but clever accountants always find ways to create new ones. And as for increasing stamp duty, they argue, this is just a bad idea. If the government were really serious about taxing property it would concentrate on council tax and order a revaluation of properties, something that governments have fought shy of for twenty years. So the jury is out on whether, in the end, the rich really will be worse off after the Budget.
Lowering income tax threshold
But providing political cover for cutting the top rate of income tax was not the main thing the LibDems were after. Their chief priority has long been to keep taking poor people out of paying income tax altogether by raising the threshold beyond which people have to pay the tax. Their goal is that no one earning under £10,000 should pay income tax at all. This, they say, is the best way to help people in work on low and middle incomes.
Critics argue that it isn’t actually the best way to help the poorest because raising the threshold helps everyone: high earners are also allowed to keep more of their money before they have to pay tax. It is perhaps for this reason that the Tories have not been hostile to this LibDem idea. If raising the threshold helps LibDem voters on low and middle incomes, it also helps Tory voters and middle and high incomes. From the start, therefore, the coalition government has gradually been raising the threshold and in Wednesday’s Budget, the Chancellor did it again, pushing it up to just over £9,200 in 2013-14.
'Tax grab on grannies'
But this is costly. At a time when Mr Osborne is trying to reduce government borrowing rather than increase it, he had to find the £3bn from somewhere else. He raised a bit by lowering the threshold at which higher earners start to pay the 40% rate of income tax (from £42,275 in 2012-13 to £41,450 the following year). But most of it will come from gradually removing tax allowances currently available to people over 65 – hence the charge of a tax grab on grannies. This was most certainly not trailed beforehand.
Defenders of the decision say that it is justified because pensioners have had it pretty good during the recent period when most other people have seen their real disposable incomes fall. The baby-boom generation that is now moving into retirement has, in so many ways, had things very cushy compared with their children’s and grandchildren’s generations. The younger generation is the first for a very long time indeed not to have a realistic expectation of ending up more prosperous than their parents or grandparents. In that context, it’s argued, it is perfectly reasonable to remove tax concessions from people already relatively well-off.
Whatever the truth of that it’s likely the politics of the decision will play out rather differently. The shadow chancellor, Ed Balls, was quick to condemn the decision. “This is a tax grab on grannies,” he said. The Tory press seems to agree with him.
Budgets tend to create a lot of noise in the short-term and then to be forgotten. The Chancellor may be hoping that this is exactly what will happen over the ‘Granny Tax’, especially as pensioners won’t actually see money being taken off them: they’ll simply not be given the benefit they would have enjoyed had the change not been made.
What really matters with this Budget, as with all others, is what happens to the economy as a result of it. Commentators seem to agree that it will have little effect. George Osborne set out two years ago on a strategy of recovery for the economy that could never be much affected by what he decided to do or not do in this Budget. But whether that strategy will ultimately bear fruit still remains to be seen.
What’s your view of the Budget?
- Do you think the Chancellor’s priorities were the right ones or not?
- Do you support his decision to cut the top rate of income tax from 50% to 45%?
- Do you think he will end up taxing the rich more through his plans to cut loopholes and increase stamp duty?
- What’s your view of property taxes: do you think owners of wealthy houses should be taxed more, either through the increase in stamp duty when they are sold, through a mansion tax or through revaluing them for the purposes of council tax?
- Is the coalition’s priority of raising the threshold below which no one pays income tax the right one?
- Was the Chancellor right to take away the special income tax allowances for pensioners?
- What would you like to have seen in the Budget that wasn’t there? And do you think George Osborne’s overall strategy for the British economy will work or not?
Let us know your views.
