One of the ‘joys’ of living through an ongoing economic crisis is that suddenly, everyone is an armchair economic pundit. Forget Robert Peston – you’ll hear a hugely diverse (often misinformed) range of opinion on this arcane, complex and, quite frankly, dull topic these days in every pub in the land. Not to mention a spectrum of political viewpoints all over the internet.
This week, the armchair economic pundits have mostly been talking about George Osborne’s typically divisive 2012 Budget. According to whose take you read, it’s a terrible budget, or a great budget, or an unmemorable budget, or an attack on the poor, or a much-needed shot in the arm for the business sector. As an armchair pundit myself, what I see in this Budget is a politically incompetent attempt to drive through more of the increasingly hardline Conservative ideology that’s been a signature of most Coalition policies since the Conservatives and their junior partners (or “human shields” – thanks for that one, Owen Jones) the Lib Dems got into power.
Poor little rich boys
Osborne called it “a Budget to reward hard work” in his Commons statement, but a not particularly close look is needed to tell that this only applies to very well-paid hard work. Key to this is the much pre-publicised dropping of the top, 50%, tax rate for very high earners to 45%. No amount of (not especially well-done) spin can disguise the fact that this is, essentially, a bonanza tax cut for the very rich, who in these straitened times are precisely the ones who need a tax cut least.
This is standard Conservative ideology. Osborne claims in one breath that it will remove a disincentive for those ‘wealth creators’ to shift their businesses to the UK, while in the next he says that the tax take from said ‘wealth creators’ will rise by five times due to other measures contained in the Budget. Well, which is it, George? If the 50% tax rate was putting them off coming here, how will other means of raking in even more money not do the same thing?
Shifting to another tack, the Chancellor and the Treasury point to a not-especially reliable ‘Laffer curve’ showing that this higher rate of tax actually decreases the overall tax take from the very rich. This, according to the Treasury, is because when the tax rate is too high, the rich find increasingly more ways to avoid paying it. Therefore, the theory runs, you’ll take in more tax at a lower rate, because those upstandingly moral wealthy people will happily pay all they owe, if that amount is generally lower.
This is an interesting perspective. “We can’t make the law work,” says the Chancellor, “so we’ll remove that law”. Interestingly, this is one of the most persuasive arguments to abandon the utterly ineffective prohibition of drugs; but somehow the same chain of logic isn’t applied there. It would be more in keeping with the government’s hardline stance on the drug laws (not to mention with Osborne’s stated aims on tax avoidance) to make more strenuous efforts to make sure the law is followed, not only to the letter but also to the spirit. But then that wouldn’t win all that goodwill from the very rich people who form a core part of the Tory voter base (not to mention donating about half of its party funds).
Laffer curves are a very subjective thing. The idea that the ‘peak’ tax rate after which revenue from taxation begins to decrease is at exactly 45%, or 50% for that matter, is mathematically simplistic. It’s also entirely theoretical until long term, reliable data has been gathered at varying tax points to make the comparison.
But Osborne claims to have this data. He points to the revenue gained from the 50% rate as being far less than the £3billion Labour claimed it would net when they introduced it in 2010 – less than a third of that, apparently. What he neglected to mention (but must surely be aware of) is that there is only data from the first full year of the tax. And because Labour gave a nice long term warning that the tax rise was going to be happening, many of those who would be affected chose to pay themselves dividends early, to avoid the new rate.
This had two big effects – it made the tax revenue for Labour’s last year in power artificially high (not that that could save them electorally), and made the first year’s takings at the new rate artificially low. According to the Institute for Fiscal Studies, had the new rate been maintained long enough, it might have brought in far more. And that’s presumably including the anticipated avoidance. If Osborne’s promised crackdown on tax avoidance happens, who knows, it could have brought in even more.
No, none of the Chancellor’s justifications for this tax cut being pragmatically and morally the right thing to do hold any water at all. Perhaps if they had someone with the skill of Alastair Campbell doing their spin, they might have. But they don’t, and this looks like exactly what it is – naked Conservative ideology, which clings to their traditional idea that the rich deserve to keep their hoarded wealth at the expense of the poor.
As if to prove this, Osborne also announced a further ‘crackdown’ on benefit fraud. So, if the poor (even the tiny fraction of them whose claims are fraudulent) flout the law, they must be severely punished. If the rich flout the law, that must mean the law is inconvenient and should be removed. Think about the message that sends – far from ‘detoxifying the Tory brand’, the current Cabinet seem intent on raising the age old spectre of ‘the Nasty Party’ – now with added Nastiness. Electorally this may not be a wise plan.
Gran, can you spare £10 billion?
And neither are the methods being used to make up the predicted shortfall. Most prominent among these, and causing howls of outrage among even the right wing press, is the so-called ‘Granny Tax’ – an apparent £10 billion tax raid on the pensions of the elderly.
This is not big or clever politically. The Chancellor is always seen as ‘Mr Nasty’; he’s the killjoy that makes it more expensive to drink, smoke, or drive your car. But mugging the elderly to give more money to the hyper-rich, that’s a new low. What next, raising tax revenue by stealing candy from babies?
Again, this could have been handled better with a little thought about the message. It’s actually tied in to the Lib Dems’ much vaunted increase in the tax free personal allowance – their manifesto pledge was that, in time, this would be raised to £10,000, benefitting everyone, but particularly low earners. A big step was taken towards that in the Budget, with the threshold being raised quite considerably to £9205.
There’s a rather nasty viewpoint that says pensioners have had it too easy during the savage cutting back of austerity, and it’s time for them to pay their fair share. That’s tied in to jealousy, plain and simple – the elderly have managed to buy houses and get good pensions – things that are rapidly becoming impossible today. So why should they get the nice stuff by virtue of having lived in easier times? Let’s drag them down to the same low standards the rest of us have to put up with!
Put like that, it actually seems a most un-Conservative policy – the elderly have worked hard for their assets, and surely standard Tory mantra would be that they should keep every penny. But this is New Conservatism, steeped in class prejudice that would make Thatcher (a grammar school girl) blanch with horror. What Osborne is doing will, predictably, only affect lower ‘earning’ pensioners. Their tax-free threshold, which normally rises with inflation, will be frozen at £10,500 for the foreseeable future. New pensioners will have it even worse – their threshold will be stuck at £9205. Not coincidentally, the same as the new tax free threshold for working people.
So the logical – and less politically explosive – thing to have done would be to make clear that it was this parity they were trying to achieve, and juggle both tax free thresholds until they were equal. Yes, some pensioners would lose out, but less than with what’s actually happening. And there might be some justification in that anyway, if spun right – which it wasn’t. It’s hard to fathom the reason for any experienced politician to handle it this way – it’s like Osborne’s actually trying to throw away the next election.
Corporation’s what you need
Perhaps he was hoping to use it to disguise yet more tax relief for large corporations – being panned for mugging the elderly might be the lesser of two evils compared to pandering to those all-purpose bad guys of unrestrained capitalism. In his quest to bring the level of Corporation Tax – on corporate profits – down from 28% to 22% (lower than almost every developed country), the Chancellor made another leap for glory by shifting it down to 24%.
On top of that, there’s an arcane rule about shifting corporate money from one tax region to another. If a UK-based company shifts profits from, say, Ghana to Switzerland, it currently has to pay the Treasury the standard corporate tax rate on the money made by doing so. Well, guess what? Not any more! Perhaps George was willing to take the hit on mugging grannies to keep that little wheeze from becoming more widely known.
This, of course, fits in with the Tory mantra that private industry will make everything better. Bring down the burden of corporate tax, the theory runs, and businesses will flock to the UK, bringing all that lovely money with them. Except, of course, they won’t be giving any of it to the state, because in Tory-world, only the free market can handle money responsibly.
This ignores two fairly well-proven things. Firstly, corporations exist to make as much money as possible. That’s their very raison d’etre. Do you really think they won’t still attempt to hoard as much of it as possible? And if they do, how will that help the economy? And secondly, it’s hard for a business to make any money in a consumer economy where the consumers have no money to spend – largely because they’re losing it all in tax to fund corporate tax breaks.
The fate of the Nice Ones
But what about the Lib Dems, and their much-claimed moderating influence on the ruthless, money-hungry class warriors of the Conservatives? Nick Clegg has been lamely pointing to a few measures that could, on the surface, look ‘nice’. Chief among these is the raise to the personal tax free threshold, which leaped much closer to the target figure of £10,000 by going up to £9205. That’s got to be a step in the right direction, surely?
Well, sorry Nick, but it’s not as good as it looks. For a start, the raising of the tax free threshold is accompanied by a lowering of the threshold for the higher, 40% rate – this has been frozen and will fall to £41,500 by 2014, meaning that more and more people will find their tax bills getting higher. Also, it doesn’t do much to help the truly poor, who may be below that threshold already.
And this policy won’t do much for the low earners it lifts out of tax either, because of a nifty little benefit technicality pointed out by the Citizens’ Advice Bureau. If you’re in that low-income bracket, chances are you’ll be claiming Housing Benefit and Council Tax Benefit. Well, these benefits taper off the more you earn, and here’s the thing – that’s net earnings, ie after tax. So while the new thresholds give £220 with one hand, the increased earnings mean that they take £187 right back. Leaving those low income households with the princely extra sum of £33 a year. Put like that, it doesn’t seem quite so generous, does it Nick?
OK then, how about the other measures, the ones that Simon Hughes claims make “the rich pay their fair share”, and Cameron says will bring in five times the revenue of the 50% tax rate? There are a couple of these, and on first glance they look quite good. Unfortunately, they’re basically fudged versions of the much more effective mansion tax originally proposed by Vince Cable, who shiftily tried to make them look good on last night’s Question Time with the haunted look of Dr Faustus discovering that his deal with Mephistopheles wasn’t as good as it looked.
These measures are to do with stamp duty, and initially appear to be a creditable attempt to tax assets rather than earnings – because they’re, sort of, a tax on property. Henceforth, stamp duty on properties worth over £2million will rise from 5% to 7%, but even more significantly, for properties bought by the tax dodging wheeze of using shell companies rather than individuals, it will go up to a whopping 15%. And there’ll be an annual duty on residential properties already owned by shell companies (though the rate for it has yet to be determined).
While this “mini mansion tax” is nice, the other rises have one basic flaw – they depend on the property actually being sold. It seems sheer madness to make confident estimates of the money you’ll make from property transactions, as there’s no guarantee of them happening at any predictable level. Hell, what if the rate of property purchase drops because of this measure? Where will the money come from then? Well, just maybe from the further £10 billion to be slashed from the welfare budget – at precisely the time more and more people are falling into poverty.
Nick Clegg is shiftily trying to claim that these measures constitute the ‘tycoon tax’ he so unexpectedly called for at the recent Lib Dem conference; despite the fact that what he outlined sounded nothing like this. He’s also saying that a proposed cap on tax relief fits the description (a good policy, nonetheless).
But I have to wonder what backroom deals were already in place with the Tories before he made that announcement. The Lib Dems attempts to spin this Budget as being anything less than naked Conservative ideology completely at odds with their own is sadly lacking here. Of course, the Conservatives’ spin isn’t too great either. The difference is that everyone expects the Tories to be nasty, even if they may have overreached themselves this time. Once again, though, I think we expected better of the Lib Dems. They’re beginning to appear almost powerless in the Coalition, and their leader’s constant attempts to defend extremely right wing policies are beginning to make him personally look like Vidkun Quisling.
Nothing in the world can stop them now?
Lib Dems aside, this should still be electoral suicide even for the Tories. Well, if they had any sort of worthwhile opposition, anyway.
Labour seemed to do all right out of the Budget. This is largely because opposing Budgets is easy, and opposing one this nasty was child’s play – even for the charisma vacuum that is Ed Miliband. But Labour still seem to have no coherent idea of what they would do instead. Vague promises are floated one week, then discarded the next. And the best their Shadow Chancellor can come up with is that he’d do more or less the same things – just more slowly.
There are three years to go before the next election, which might give both Labour and the Lib Dems the chance to shape themselves up into some kind of credible opposition to the Tories. Let’s hope so. Because right now, the fact that the Tories have the sheer gall to put through a Budget this mercenary and selfish seems to indicate that they think no-one can challenge them. And on the present evidence, they may well be right.
Simon’s Incoherent Blog 