Thoughts on the emergency budget

George Osborne stood up in the House of Commons earlier this week and pronounced that we’re all going to be stuffed for the rest of this Parliament as a result of foolish Labour overspending, and an age of austerity (i.e. spending cuts and tax rises) awaits. Here’s my thoughts on some of the measures announced on Tuesday:

Personal allowance increase: I’m disappointed to see this measure make it into the budget, as I don’t think we have sufficient funds to afford it and increasing the personal allowance does nothing to help people on very low incomes who already pay no tax. I suspect this was a concession extracted from the Conservatives by the Lib Dems so they could claim to at least be having some input into economic policy. At least Osborne has done the sensible thing and reduced the higher rate threshold to compensate, so people on incomes of £42,000+ (roughly) won’t benefit from the extra allowance.

VAT increase: This had been predicted by almost all the pundits for several months, so it wasn’t a particularly big surprise when Osborne announced that VAT was going up to 20% from January 2011. Personally I think this is the right thing to do, as VAT will raise a lot of revenue for the Treasury and putting off the increase allows the economy to recover somewhat beforehand. My only concerns are that it might hit people on low incomes and small businesses who won’t necessarily be able to adjust their prices easily.

Insurance Premium Tax: For some reason this was ignored by almost all the mainstream media (though the insurance media were up in arms), despite the fact that it’s effectively a 20% increase in tax on most short-term UK insurance products (e.g. motor insurance). I suspect this is because few people are aware of the tax, and most of us spend relatively little on insurance compared to other goods and services (average spend per year is around £800 I think, most of which will be car and home insurance). It’s a sensible increase though—and one I advocated because of its ease of collection and low impact—which will hopefully reduce the need for more severe cuts elsewhere.

Housing benefit: There is going to be a cap on the amount of housing benefit offered, although at £250/week for a one bedroom flat (more than twice what I pay for somewhere in Didsbury) I don’t think that will be a major problem for anyone outside the South East. More worrying is the move from using the median rent value to the 30th percentile when setting levels of benefits in each area—this will result in a big cut for many people.

Bank levy: This seems like a sensible idea in principle, although I would prefer that it was put off for a short while in order to give banks time to rebuild their balance sheets. I like the fact that it will only be levied on “risky” funding, as this should shield building societies and sensible banks (e.g. HSBC, which funds a lot of its lending from retail deposits and shouldn’t be penalised because Northern Rock didn’t). The City doesn’t seem too upset either, clearly they were expecting something far worse.

Public sector pay freeze: Anyone earning over £21,000 in the public sector is going to have their pay frozen for two years. Whilst I think this is a sensible idea from a financial point of view, the limit should have been set a bit higher—perhaps the same rate as the median wage.

Capital gains tax: A modest increase from 18% to 28%, implemented with immediate effect—presumably to avoid a mass sell-off of assets. I’m not sure that this will raise a large amount of money, but it’s a step in the right direction for aligning capital gains with income taxation.

There have been lots of arguments over whether the budget is progressive (i.e. the burden falls more on the rich than the poor, as a percentage of their income), as claimed by George Osborne when he commended the budget to the House of Commons. The main argument against appears to the reputation VAT has as a regressive tax. This is justified to an extent, because people on lower incomes do tend to spend a greater proportion of their income on VAT in comparison to people on higher incomes. However, many essential items—particularly most foodstuffs—are exempt from VAT and so won’t be directly affected, although there may be a small feed-in increase from ancillary costs of transportation etc.

Overall, I think Osborne did a reasonable job, given that he only had a few weeks to prepare this budget and the economy was left in a right mess by the outgoing Labour government. The housing benefit overhaul is the one change which I am worried about, because I think it will hit people on low incomes particularly hard. I’m also disappointed that no radical proposals for tackling the problems of pensions were announced (e.g. a cap on annual contributions), although there is going to be a review of public sector pensions. I would have preferred to see more emphasis on tax rises for the middle classes (income tax gradually increased back to 23% for basic rate taxpayers) and less on cuts, but I’m sure there’s more to come in the autumn.