Archive for juin, 2010

Ring-Fence Health?

lundi, juin 28th, 2010

All three main political parties insisted at election time that frontline services for healthcare would be protected from spending cuts. This suited the Conservatives at the time with health an issue on which the public trusted Labour more. However, health expenditure has grown to more than 9% of GDP and around 20% of public spending. Does it still make sense to continue to ring-fence Health (and overseas aid), when this means that non-protected government departments face 25% real cuts on average by the end of this parliament? Indeed, if in addition Education and Defence are each limited to 10% cuts, real cuts elsewhere could reach 33%. This places a heavy burden on Welfare reform and Ian Duncan Smith the Work and Pensions Secretary, who has soon to outline a programme to start to make work pay for millions of people solely dependent on benefits, whilst making savings elsewhere. He has already announced plans to phase out the default retirement age and raise the State Pension age to 66 by 2016. Couples and lone parents will also have to downsize when their children leave home and housing benefits will be cut.
The tax increases and spending cuts announced by George Osborne add up to £40 billion by 2014/15 and, according to the Institute of Fiscal Studies (IFS), £52 billion by 2015/16. However, he did not mention that his £40 billion will account for only 35% of the planned austerity programme for the next four years, the majority already laid out for him by Alistair Darling, the former Chancellor, to cut the deficit by £73 billion by 2014/15, including a 60% drop in public sector net investment although Labour had not carried out a detailed spending review of where these cuts might apply. Thus Alistair Darling was still able to state in the Commons that the cuts could not be carried out in this form and leave the Tories with their reputation for heartlessness, unless e.g. Ian Duncan Smith and his coalition team can convince the country otherwise through their actions and by more temperate language than in the past, that there is indeed some light at the end of the tunnel.
On one hand, the independent Office for Budget Responsibility (OBR) forecasts that with growth increasing to an average 2.75% per year, employment reaching over 30 million and unemployment correspondingly falling, and with inflation within the Bank of England target of 2%, the deficit will be eliminated. At the other extreme, there is a double-dip recession because of the state of the worldwide economy and public borrowing will be 6% of GDP by the end of this parliament. Put another way, either the private sector runs down the short term surpluses it has built up from temporary retrenchment during the recession and becomes the prime driver of growth (as foreseen by the coalition), or it has moved into a protective mode of long term financial surplus with the public sector then forced to run a deficit to compensate, as in the stagnating Japanese economy of the past decade.

Unavoidable Budget

jeudi, juin 24th, 2010

George Osborne on 22nd June in his first budget, which he termed ?the unavoidable budget?, split the austerity impact between 77% of spending cuts and 23% tax increases, with the new capital gains tax top rate set at 28% and much less than the 40% or 50% rates feared.
The budget tax highlights included:
? The standard rate of VAT will rise to 20% from 4th January, 2011 although goods & services currently exempt from VAT or subject to VAT at zero or 5%, will not be affected.
? In 2011/12 the personal allowance will increase by £1000 but the basic rate limit will be cut at the same time, thus not benefiting higher tax payers.
? Capital gains tax will remain at 18% for basic taxpayers but will increase from 23 June, 2010 to 28% for higher and additional rate taxpayers.
? Entrepreneur relief will remain at 10% but the lifetime limit will rise to £5 million per person from 23 June, 2010.
? To favour business, the main corporation tax will fall to 27% from 1 April, 2011 and be reduced by 1% per year over the following three years.
? From 1 April, 2011 the small profits corporation tax rate will be reduced to 20%.
? The annual investment allowance will be cut to £25,000 from April, 2012, with writing down allowances for plant and machinery also reduced.
? From April 2011, the effective requirement to buy an annuity at age 75 will be scrapped.
For those of us who participated in the recent study group in anticipation of this budget, it?s interesting to compare the Michael Webster discussion paper (refer to Pages/Study Groups/Budget1) and the subsequent commentary by Michael Barker (refer to Pages/Study Groups/Budget2) in the index column on the right, together with our associated discussion.


jeudi, juin 17th, 2010

For our Study Group Subject III on Friday 18th June, Michael Webster has submitted a Budget discussion brief which can be found under Pages/Study Groups/Budget 1 together with its associated Appendices 1, 2 & 3 in the right-hand column index. This has already been complemented by Michael Barker whose response can be referred to under Pages/Study Groups/Budget2 again in the right-hand index column.

Capital Gains

lundi, juin 7th, 2010

Robert Chote, director of the Institute for Fiscal Studies, contributed an informative article on ?Solutions to the taxing issue of capital gains? in last Sunday?s Times (refer also to Pages/Capital Gains Tax in the righthand column index). The Liberal Democrats consider capital gains tax (CGT) as a good way of raising money for income tax cuts whilst some backbench Tories call raising it to income tax levels an attack on the middle classes and a betrayal of Conservative values. CGT is forecast to raise £2.7 billion this year, only 0.5% of total government revenue but has perhaps a key role in underpinning the much bigger revenues from income tax and National Insurance. He favours the Liberal Democrat approach which also aims to minimise the scope for tax avoidance and, given that the coalition will be forced into many unpopular measures to clear up the inherited fiscal mess over the next few years, recommends taking the opportunity of developing a more rational tax system rather than resorting to short term fixes.

Deferred Taxation

dimanche, juin 6th, 2010

David Laws, before his unfortunate and forced resignation as the treasury chief secretary, put it very succinctly with his confident command of financial affairs in stating that government borrowing is effectively only deferred taxation.
It is on the tax front then where Conservative voters have been disappointed that a pre-election pledge to provide more generous Inheritance Tax allowances has now been withdrawn. Indeed the government is also bringing Capital Gains Tax into line with Income Tax, although the annual exempt allowance will apparently not be cut and the new rate is not likely to exceed 40%, even for 50% tax payers. This is the result of a policy compromise between the Tory right and the Liberal Democrat left, which includes Vince Cable the business secretary; however, it also reflects the grim reality of the government?s empty coffers.
Otherwise it would appear that the tactic to keep the coalition together is to not try and reach a compromise on every issue when each side could end up dissatisfied. Thus the Conservatives have kept the major part of their tougher policies on immigration and Europe, whilst the Liberal Democrats have their way on voting reform if MPs approve a referendum on this, as well as their zero tax band on the first £10,000 of earned income (which also suits the progressive Conservative approach to the less well-off, even in times of austerity).