Budget 2012: A big debate about small numbers

 

Here's the best news about tomorrow's UK budget: it's not going to be about the big numbers.

Here's the bad news: it's going to revolve instead around whether George Osborne is cutting taxes on Britain's highest earners.

Why is that bad news? Because it's a question that may well be all but impossible to answer on the day.

If all goes as expected, the chancellor will replace one, possibly not very effective, tax on high earners with a collection of other taxes on the rich, whose effectiveness will be even more difficult to judge. It will not be an easy one to call.

A quick reminder where we stand on the big numbers, before returning to the small ones, that may cause so much pain tomorrow.

Lest we forget, the UK economy and the public finances are still in a horrible state. At the time of the pre-Budget report the OBR forecast Britain's national output would expand by just 0.7% in 2012. Only a year ago, it thought we would grow by 2.5%. And even that was not so hot, for an economy recovering from the steepest recession since the 1920s.

But as far as Mr Osborne is concerned, the bad news is also old news. The economic outlook hasn't got any bleaker since November. And when it comes this year's borrowing numbers, the picture is even looking a bit brighter.

UK Chancellor of the Exchequer George Osborne Which tax will Chancellor George Osborne cut?

Shadow Chancellor Ed Balls always says the government is "cutting too far, too fast." That's up for debate. But what does seem to be true is that government departments and local authorities have cut further, and faster since last spring than Mr Osborne asked them to.

In the first 10 months of the financial year, central government current spending fell by 1.2%, year on year. Over the full year, the plan had been for spending to rise by almost the same amount (which would still have meant a real terms cut.).

In the same 10 months, borrowing by local governments rose by £1.2bn, relative to a year earlier. That sounds bad. But Mr Osborne was actually expecting their borrowing to rise by nearly £8bn over the course of the year.

The upshot is that, even with some "catch-up" spending in the last month or two, government borrowing for 2011-12 is likely to come in at least £3bn to £5bn below the OBR forecast for 2011-12 of £127bn.

City economists are divided as to whether this reflects a lasting improvement in the public finances, or a one-off. But the message from the Treasury is that Mr Osborne is not assuming this will last.

Fitch, the ratings agency, helpfully made the chancellor's point for him last week when it put the UK's AAA rating on negative watch. If Mr Osborne still has his heart set on preserving the country's top rating - and he apparently does - he will not see this modest reduction in borrowing as a reason to ease up.

So, for the first time since 2008, the "big" issues in tomorrow's Budget will be politically explosive, but in economic terms, very small beer indeed.

We seem destined to be talking about: lowering the top rate of tax from 50p to 45p; a clampdown on tax avoidance by the very richest, including the purchasers of expensive UK property; not removing child benefit from certain relatively well-off households, and an increase in the standard personal allowance.

Of these, only the last - an increase of the personal allowance - affects the majority of taxpayers and potentially involves a lot of money. That is why we have to assume he will not raise it by very much.

The personal allowance is already going up by £630 this year, £210 higher than if it were simply being indexed to inflation. To raise it to £10,000, as the Liberal Democrats have said they ultimately want to do, would cost around £9bn in 2012-13. Even raising it by another £200 in 2012-13 would cost nearly a billion.

Assume we have some modest further increase in the tax allowance. The question of the hour, when Mr Osborne sits down tomorrow, will be how this modest giveaway to Britain's "hard-working households" compares with any change in taxes for the top one per cent.

This is when we would usually want to refer to one of those nice charts, showing how tax - and benefit - changes are likely to affect households at different parts of the income scale.

The problem is that, as F Scott Fitzgerald might have said, the top one per cent are different from you and me. And one of the things that's different about them is that they don't fit neatly into distributional charts. Not least, because their income tends to be a small and highly 'flexible' proportion of their wealth.

Assume, as many now expect, that Mr Osborne announces a phased reduction in the top rate of income tax from 50p to 45p, starting in April 2013. Assume, also, that the report into the top rate suggests that the tax is raising less than expected - say, £750m.

On its own, that would sound like a tax break for the rich - albeit a very small one. (Remember, income tax alone will raise £160bn this year.) So Mr Osborne is also likely to throw in the "tycoon tax" - a long list of anti-avoidance measures targeted at the very rich, which he may say are "paying" for that increase in the personal allowance.

It will be difficult to say there's been a big tax cut for the rich, if the tax that is being cut was not actually raising any money - though expect there to be plenty of argument over that report.

But the claim that the richest are paying more will also be rather tricky to prove. After all, chancellors always say they are going to close loopholes and cut down on avoidance - Mr Osborne promised to raise a billion with such measures only a year ago. We'll never know exactly how that turned out, either.

It's not that the forecasts are dishonest. It's just that, to put it bluntly, the money all looks the same when it comes in. The wealthy entrepreneur doesn't usually attach a note saying that he usually manages not to pay much tax but this year he'd been forced to cough up.

Perhaps tomorrow will be different. It will all be clear and easy to prove. But it's difficult to see how.

If Mr Osborne has his way, a budget for jammy dodgers will miraculously turn into a budget fit for Robin Hood. But good luck to the man - or woman - who has to establish whether the chancellor's numbers "add up".

 
Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this
    +6

    Comment number 24.

    What you mean is whatever the budget says , the media ( BBC ) will make it about tax cuts for the rich and nothing for the poor. Maybe what it should be about is why after all the promises and all the hot air, the same people, those who actually work , are having to finance those who wont.

  • rate this
    +3

    Comment number 23.

    20. Whistling Neil
    Approx 15 - 17% of all income is earned by the top 1%.
    - - - -
    Thank you for that.

    In a way the percentage of tax take from different parts of the income spread is a red herring. Almost nobody would complain that the bottom 1% of employed earners pay no income tax (I presume) so what should society decide is a fair rate for each income group?

  • rate this
    0

    Comment number 22.

    Main objective of taxation is to raise revenue to fund Govt exp. Whilst it is impt to consider fairness, taxes are very costly in terms of administration, compliance, but most sign. how they distortion people’s behaviour. Most blogs seem to have little appreciation of this. Thus most effective tax system is one which is broad based & imposes uniform low rates. Further reading see Mirrlees Rpt.

  • rate this
    +4

    Comment number 21.

    There will always be a top 1%, simple maths dictates that, even if there's only a hundred people left in the country.

    I'm way below that 1% but I dislike paying the rate of tax I'm paying, not the income tax, I can see that come out of my pay packet and I can account for it. It's all the other taxes I pay every time I buy something and every time I travel.

  • rate this
    +6

    Comment number 20.

    16 Approx 15 - 17% of all income is earned by the top 1%. The direction of travel is also only one way - the top 1% are earning a greater % which in turn is increasing the proportion of income taxation they are paying. It is the conundrum, the more unequal income becomes, the less fair the tax burden appears.

  • rate this
    +8

    Comment number 19.

    Regardless of whether or not it raises extra revenue or encourages 'welloffs' to depart, surely in a time of hardship to decrease taxes on the very wealthy can only dismay the majority who are paying for everything whether in inflation, higher charges, lower savings rates on interest or reduced benefits. Government should at least ATTEMPT to unite the people for the benefit of all.

  • rate this
    +4

    Comment number 18.

    Govt has reg missed the opp to reform the tax system, broaden its base & create a coherent environment where tax considerations distort as little as possible decisions to work & save. Instead George has sought to raise revenue wherever he can. Any attempt by the govt to close loopholes & remove distortions from the tax system is welcomed if it leads to a low rate broad-based system. Unlikely.

  • rate this
    0

    Comment number 17.

    A budget fit for jammy dodgers or Robin Hood? I suspect many couldn't give a fig roll but it's likely to be more like a custard cream budget-a bit bland but greatly improved by dunking in some warm credit easing tea and hot, stimulating infrastructure projects coffee.

  • rate this
    0

    Comment number 16.

    2. Jon
    With the top 1% of earners paying 27% of all income tax we should entice them to stay and not clear off abroad.
    - - - -

    We keep being told this. It may be true.

    The point is irrelevant without knowing whether top 1% of earners earn more or less than 27% of all income!

    Anyone know the actual percentage?

  • rate this
    +7

    Comment number 15.

    The one thing i have learned in my years on this planet is that after the budget i will be worse off financially than before it.

    This is irrespective of who is in Government.

    The only people who ever benefit long term are the 1% this is how it will always be under the current political system.

  • rate this
    0

    Comment number 14.

    In the final analysis ALL government are judged by how they have performed in reducing inequality.

    Osborne has to remember this or his Government will fail - they may try to blame the Liberals, but it is hight likely that the public will blame his party, the nasty party.

    The biggest problem he has is that the economy is bankrupt in that money is still worthless - he MUST re-price money or fail.

  • rate this
    +22

    Comment number 13.

    What we really need from GO in the budget is:
    Cuts to Govt - no more new QUANGOs, no more wars & daft ideas.
    Tax reform - getting rid of hidden and stealth and indirect taxes and moving to straight, upfront direct taxation.
    Proper pricing of money and a return to saving.

  • rate this
    +1

    Comment number 12.

    "If Mr Osborne has his way, a budget for jammy dodgers will miraculously turn into a budget fit for Robin Hood."
    ==
    Well, that's a bit personal, Stefanie. And if there's anything whatsoever in the budget for this particular jammy dodger, I'll dip myself in a cup of coffee and have myself for breakfast.

  • rate this
    +5

    Comment number 11.

    Simplification of the tax system is hostage to perceived fairness, even though there are unfairnesses already. Time to consolidate pensioners benefits in the state pension? For a non taxpayer they'd still be tax free. Small beer I know. but less admin.

    We are all paying far too much tax. If there aren't some significant changes soon it'll be too close to the next election for real change.

  • rate this
    0

    Comment number 10.

    Yet another aspect to the practice of chumming.
    In this case the big fish are simply being encouraged to feed.
    There is no intention of catching them. Simply feed them up.

  • rate this
    +1

    Comment number 9.

    And growth? What has become of growth Mr GO. If the public sector has been good at cutting then with an inevitable fiscal lag the economy will be given another twist downwards and the rating agencies will be sharpening their pencils.

  • rate this
    +7

    Comment number 8.

    Given the increase in tax revenue collected when the top rate was cut from 60% to 40% during the 70s (assuming more rich people must have ended up paying, by coming back to the UK etc) - surely it seems a logical thing to cut the tax if we end up raising more.

  • rate this
    +9

    Comment number 7.

    With all the media-babble about tax cuts, why is there not more focus on helping companies create (jobs and exports) so that the overall amount of tax collected gradually rises for the betterment of the people and the country as a whole....focusing on "the rich" is a banal and sterile approach.

  • rate this
    +5

    Comment number 6.

    Apart from those who pay no or next to no tax at all, we ALL pay a punitive amount of tax in this country. If, every year, we were all sent to forced labour camps for 5 months, we would complain about it. Yet effectively, we do work for the government, free of charge, 5 months a year. Tax is never the answer - in fact it's a very large part of the problem.

  • rate this
    +13

    Comment number 5.

    You don't need a degree in economics to know that we are to far out from an election for "tax cuts for all" "for the benefit of the economy" What is good for the economy now, is not what is good for the politicians.
    My analysis is that the economy will have "recovered enough" to offer tax cuts, just before the next election.
    They must hold the public in real contempt, to be so cynical.

 

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