Michael Webster has provided his comments on the budget of George Osborne and these can be found in the index column on the right under Pages/Study Groups/Emergency Budget .
Emergency Budget
juillet 5th, 2010Ring-Fence Health?
juin 28th, 2010All 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
juin 24th, 2010George 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.
Budget
juin 17th, 2010For 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
juin 7th, 2010Robert 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
juin 6th, 2010David 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).
Coalition Government
mai 24th, 2010Coalition government has some benefits for the Prime Minister:
– It strengthens his pre-election claim to sceptical voters that his party has modernised and indeed has now been rebranded the Liberal Conservatives, as he describes his new government.
– His Liberal Democratic partners are taking joint ownership of hard decisions on spending cuts.
– The coalition agreement also allows him to drop difficult manifesto pledges such as modifying the Human Rights Act, repatriation of powers from the EU and an inheritance tax break for the richer part of society during a budget crisis.
In addition, he still has room to move a little to the right of centre with Gordon Brown having already having shifted Labour a little to the left in cancelling the plans of Tony Blair to reform the welfare state and public services.
The Conservative right has been rewarded with right wingers such as Ian Duncan Smith appointed Minister for Work & Pensions and Liam Fox placed at Defence: the Conservatives have also secured the Home Office with e.g. the immigration amnesty of Nick Clegg having cost the Liberal Democrats many votes.
As a result, party management has become his top priority and having ignored his influential 1922 committee of backbenchers to force through the coalition agreement, he has also forced through a vote for it to accept ministers as committee members who can vote to elect its officers. However, he still needs the support of his party and natural Conservative supporters, not helped by agreeing to raise the income tax threshold to £10,000, paid for by rises in capital gains tax that will e.g. impact second-home owners. (He has even had to subsequently retreat in front of the 1922 Committee back-benchers by agreeing that after all his ministers will not be able to vote in their elections.)
Therefore, he is back talking in the media about mending the so-called ?Broken Society?, being at heart a ?low-tax Conservative? and promising to revisit the contentious issue of the 50% top tax band. This is very necessary loyalty building in the ranks with the Liberal Democrats not always natural partners for the future.
Tax Policies
mai 12th, 2010The brief on Tax Policies prepared by Michael Webster and discussed during our study group session last night can be found under Pages/Study Groups/Tax Policies in the right hand column index. Michael Barker who participated has added the following comments:
I thought the evening?s discussion went well though one thing we did not really explore was recouping public money thrown at banks to bale out their naked speculative greed and incompetence nor a possible taxation vis.à.vis joint-stock banks, investment banks, hedge funds and the like, and the huge quantity of daily transactions. I feel sure that there is scope for a small % take on such transactions, small % enough not to cause too much of a fuss from the money-makers but when the public see how huge profits are again being made by Goldman Sachs and the like, it would be popular with the electorate and seem like a move to make capitalism generally more fair for the common good and contribute to the pot. Given my ignorance of economics, I am probably the least useful member of the group to contribute to the debate, it is mostly my gut reaction.
I do think that there is a case for raising the lowest band of income tax to encourage people either on low incomes or on welfare support to move on to self reliance, small entrepreneurship and so on, and it would have a beneficial knock-on effect enabling them to climb up the ladder AND there should be made available a system of small ?seeding? loans which conventional banks avoid. Sadly it is too often not the indigenous British ? feather-bedded by the long-standing system of too-freely-handed-out benefits – but the immigrants, seeking to better themselves, who seem to have taken the initiative (though of course there also the free-loaders who take advantage of lax systems ? much in need of tightening up). If the ingrained British distaste latterly for being servants can be overcome (odd really, we all serve some master or other), the idea of giving tax breaks to not only well-off employers – but also the comfortably off – to seek staff, that seemed to me a good idea BUT given that many retired people who would probably be available but are on pensions though active and healthy (and probably a bit bored) – they would need to be not unduly penalized by the tax system, otherwise the incentives to resume working would be completely lost.
Clearly the Conservatives will have to bite the bullet at an early date – making it absolutely clear – without fudging the issues as the Socialists have ? and spell out the depth of the problem of debt in which Britain is mired and encourage a back-to-the-wall spirit ? the will to pull together and make some sacrifices ? promoting a new mood of freeing the people from state interference and nannying. It worked in the last war, this time the enemy is not Nazi aggression but a financial mess which affects us all and needs to be resolved with firmness. Not an easy task, there will be lots of backlash and whining. One can only hope that Cameron has the backbone to weather the forthcoming storms.
I am also convinced that the income tax system should be much more evenly graded (like the French system) to be put into a much higher bracket which reduces the incentive to succeed. As for inheritance tax, I rather agree with Michael Webster that the threshold should be raised substantially. It does not bring in that much revenue and is seemingly expensive to manage; philosophically it is perhaps a socialist-envy issue and I dare say rather outdated.
What does seem to me important is that there should be a sort of National Plan (albeit it sounds rather like Socialism) ? clearly laid out:- this is the problem we all face, these are the proposed solutions. Put to the people ? probably best in a Referendum ? they will respond positively I think to the need for belt-tightening. If not there will have to be another election and another mess. What does need to happen in my view is that systems should be made simpler and bureaucracy reduced.
Voilà – my thoughts for whatever they are worth.
Best wishes,
Michael
Less Tribalism
mai 10th, 2010In the end it was just too steep a hill to climb in order to completely recover the Conservative majority lost in the Labour landslide of 1997. However, now is not the time for a blame game on what might have been achieved with an aggressive approach to the election based on more traditional Conservative policies. As demonstrated by all three major parties in Westminster, the electorate in general was not judged ready for all the necessary tax rises and associated cuts in public spending required after the election to reduce the budget deficit within a time period acceptable to the financial markets. Having, therefore, retreated from their original more aggressive position on cuts the Conservatives were still able to differentiate their position somewhat and gain some traction particularly with the business world, in support of their proposed reduction in the national insurance increase of Labour. However, they failed in launching their one big idea of the Big Society which had apparently been untested on the public by focus groups and candidates also found difficult to understand, accept and, therefore, sell to voters on their doorsteps. On the other hand, the prime minister was forced on the defensive and reverted to the politics of fear and the old class warrior of the Left to shore up the traditional Labour vote. Despite surprisingly losing some seats the Liberal Democrats have emerged as the king makers and also demonstrated the power of a more simple concept with the electorate i.e. for no income tax on the first £10,000 of earned income, which also has the added benefit of attracting people off welfare support. How the Liberal Democrats proposed to pay for this was debatable but as a small example my son and daughter were sufficiently attracted to vote Liberal Democrat in their two Labour-dominated London boroughs.
Now is, therefore, also not the time for tribalism politics as the Conservative party obviously wants power and David Cameron has shown true leadership in putting the state of the British economy first in reaching out to the Liberal Democrats to secure a working majority in the Commons.
Leaders`Debate 29 April
avril 30th, 2010Despite the economy being given advanced billing as the main topic of the third and final TV debate, unsurprisingly not one of the three leaders was prepared to specify in any detail the real extent of spending cuts and tax rises required whichever party might be in power after 6th May. However, David Cameron with his message of change after 13 years of disastrous Labour government and the need to differentiate between the economy and `Big State? Labour, maintained the Conservatives` lead over a prime minister trapped by his economic record and forced to acknowledge the difficult trade-offs required in office, such practical aspects not so popular with viewers. Nick Clegg with his more audience appealing `If we do things differently, we can build a better, fairer Britain? also continued to boost the Liberal Democrats in the polls.
Whichever party holds the majority of seats after the election will need a strong mandate to implement the measures required to restore the economy; even a Conservative – Liberal Democrat coalition resulting from an otherwise hung parliament is then likely to have the added support from the Country of a clear majority of actual votes cast.