Tuesday will see George Osborne’s emergency budget, which I expect will contain a swathe of cuts and an increase in VAT. Since my A level in economics makes me more qualified to write a budget than Osborne (with his Modern History degree from Oxford) here’s what I would do:
No tax cuts: It would be jolly nice to give people an increased personal allowance of £10,000, but there simply isn’t the money to do this. The only concession I would make is to increase the allowance in line with average earnings, as there was no increase in the 2010 budget. The higher rate band would remain the same, to drag a few thousand more into the 40% bracket.
Increase Insurance Premium Tax: This tax, levied at 5% on most insurance policies (excluding life insurance, and a higher rate applies to travel insurance) brings in £2.2bn for the Treasury. Increasing it to 6% would bring in another £400m, without pushing up premiums too much – a 1% rise in price but a 20% rise in tax. It’s a tax which few people outside the industry are aware of, so a small increase would probably fly under the media radar – i.e. you could implement it without facing a backlash from the Torygraph and the Mail.
Increase capital gains tax: I’m slightly wary of increasing CGT in case a huge rise results in a large scale sale of assets in order to avoid the increase. There is also no point in reducing the annual allowance, as the Lib Dems suggest, because at that level you would probably spend more money collecting the tax (there’s no automated method like PAYE) than the actual receipts. Therefore my suggestion would be to increase the rate from 18% to 20% for now, which offers an increase in receipts with little additional cost (you simply get the people already paying CGT to cough up a bit more), but the increase wouldn’t be so large as to cause a huge sale of assets to avoid it.
Increasing VAT: I would put this off until the next budget in order to give the economy time to recover, but send out a warning that VAT will rise to 18-20% from 2012.
Reintroduce the 10% tax band: Gordon Brown got rid of this progressive taxation band. I would reintroduce it, and revert the next band of income tax back to 22%. I would also announce another penny on income tax (rising to 23%) in the 2011 budget, which would bring the rate back into line with what it was before Labour came into power.
Cap pension contributions at £25,000: At the moment, you could put up to 100% of your salary into a pension and get tax relief on the full amount. This greatly assists fat cat bosses on huge salaries, but has little benefit for people on lower incomes. I would still allow contributions over £25,000 a year, but these would not receive tax relief.
Cap public sector final salary schemes: Public sector final salary schemes are likely to cost the country a small fortune in the coming years, as people live longer and healthier lives. £50,000 a year should be more than enough for a retired civil servant to live on, so that would be the maximum benefit, regardless of final salary or length of service. For anyone expecting to receive more than £50,000, they would still be required to continue contributing even when they had accrued the maximum level of benefits.
Increase stamp duty but introduce marginal rates: Currently stamp duty on property purchases is levied based on the total value of the property. However, unlike income tax, stamp duty is not marginal, so if the purchase price is just £1 into the next band you pay the full rate on the whole amount. I would change this so that the tax was only levied on the marginal amount (e.g. on a property worth £126,000 you would pay stamp duty on £1,000), and also increase the levels slightly to compensate for any lost revenue.
These various changes would raise some much needed cash, save money on pensions and make the tax system a bit fairer.