Business

Budget 2012: A big debate about small numbers (cont'd)

  • 21 March 2012
  • From the section Business
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As expected, this wasn't a Budget about the big picture.

The state of the economy and public finances hasn't changed much since November, and in theory, all the many changes the chancellor announced on Wednesday leave the balance between spending and taxes at the end of this parliament more or less unchanged.

But that assumes, among other things, that Mr Osborne hasn't just given a £3bn tax break to the richest earners.

That is what the reduction in the top rate from 50 pence to 45p would cost the exchequer, if this top 1% of taxpayers did not change their behaviour any way.

But HM Revenue & Customs believes that rich people respond to incentives. Just as they managed to cut their taxable income to avoid this tax, so now the lower rate will encourage some to declare more - meaning that the eventual cost will be just £100m, if that.

The debate about that judgment will continue for some time - not just among the politicians but also economists. The Office for Budget Responsibility thinks it's a reasonable - but prone to enormous uncertainty.

In considering the responsiveness of taxpayers in this category, the HMRC has a range of possible estimates.

The OBR has (tentatively) endorsed the most conservative one, which is that top rate taxpayers have a "taxable income elasticity" (TIE) of 0.41. I will get into this a bit later, if I have time.

Suffice to say now that it assumes taxpayers respond quite a lot more than the Treasury originally assumed when the first estimates of the TIE from the 50p rate were drawn up. Then it expected the rise from 40p to 50p to raise £2.6bn. Instead, it has raised £700m.

As I say - all enormously uncertain. There is clearly room to wonder whether the behavioural change will be symmetrical. If you have spent a lot of money setting up a company, for example, to avoid the 50p rate, it's not obvious you will break that up now the rate is 45p. On the other hand, it's plausible that some other money will come back into the system. It really is too soon to say.

What is certain is that millions of basic and higher rate taxpayers people will pay less tax next year as a result of this budget. And that the UK is less than half way through an unprecedented seven-year programme of tax rises and spending cuts that - the chancellor suggested on Wednesday - could involve a further £10bn in welfare cuts from 2014-15.

The debate over the 50p rate may well light up the political landscape for weeks to come. But the picture for the budget and the economy is still pretty bleak.