George Osborne’s third budget cut the rate of income tax to be paid by the richest 300,000 people in society while Britain’s pensioners will pay £3.5 billion more in tax.
Those are the main headlines from an hour long speech in which the Chancellor of the Exchequer also admitted that growth was lower than expected, with unemployment higher and the government borrowing more than he had previously forecast.
Unemployment is still rising every month as economic growth struggles to reach a fraction of one per cent. The Chancellor may have called this “a budget for work” but he also chose to cut public spending further rather than investing to stimulate the economy. And a £10 billion welfare cut over the next three years was announced although details were not given.
Many of this budget’s key measures had been leaked in advance, so there were not too many surprises left for the Chancellor to unveil in his speech. The main measures were known – increasing stamp duty for houses costing over £2M, a cut in the top income tax rate to 45% from April 2013 and the raising of the personal tax allowance to £9,205, also from April 2013.
This was a coalition budget and as such the Chancellor has to at least be seen to have negotiated with his allies, Nick Clegg and the Lib Dems. And there has been a great deal of pressure on Clegg to deliver something positive, given his party’s surrender to the Tories over the NHS Bill for England.
For many weeks now, the contents of this budget have been argued over at the so called Quad meetings of messrs Cameron, Osborne, Clegg and Alexander. But how much influence did the junior coalition partners have on the final package of measures?
The Lib Dems will argue that the increase in the amount that can be eared before tax is paid is a success for them. It will put money into the pockets of everyone, around £220 per year, although for some on the poverty line it has to be balanced by the loss of means tested benefits.
But the price Clegg agreed for this was the reduction of the 50p top tax rate, which will bring down the tax bills of those earning over £150,000 a year – and in some cases cut them by many thousands of pounds each year. Quite how the Chancellor can justify a tax cut for the wealthiest when the economy is in a poor state and there are cuts everywhere is beyond me. Yet it gives a clear indication of his priorities.
Osborne argued on Sunday that his intention in this budget was to help low and middle earners. This clearly falls down right away – unless of course the millionaire Chancellor includes those earning £150,000 a year as middle earners.
Nick Clegg had initially stated that he saw no case for reducing the top rate 50p tax rate. Then he said that he and his colleagues would support the move it if were balanced by a mansion tax. And then the mansion tax was seemingly abandoned. Was this because David Cameron scuppered the idea knowing that most of the mansions are in London, which is just about to vote for a new Mayor? Clegg then came up with the tycoon tax, which simply sounded too radical for the posh boys to countenance.
So in the end Clegg backed the tax cut for the rich he had previously opposed and in exchange settled for the personal allowance reduction, the principle of which had been agreed anyway, an increase in stamp duty that will only impact on around 4,000 house sales a year and some new, if half hearted, measures to cut tax evasion through the implementation of a previously commissioned report. Not a good deal for the Lib Dem leader at all.
A poll earlier this week revealed that 67% of voters wanted to keep the 50p top rate, introduced in 2010 by Gordon Brown. This strong support is spread remarkably evenly across the country, the social spectrum, and the political divide. Even among Tory supporters, 65% want the top rate retained. So it is a big political gamble for the Chancellor to remove something so popular.
One surprise in this Budget was George Osborne’s announcement that the age related personal allowances for Britain’s 4.4 million pensioners would not be increased with inflation and will be phased out for existing pensioners. This seemingly minor announcement will net the Chancellor £3.5 billion. The loss for existing pensioners will be £63 a year and £197 for new pensioners, who will not get any additional age related allowance at all.
Only a cabinet of millionaires could come up with the notion that public sector workers in the poorer areas of the UK should be paid less. The true intention of course is to weaken unions by removing the national pay bargaining system, as well as to save money by driving wages down in areas outside London and the south east. And Osborne confirmed that the idea of some government departments introducing local pay scales will be investigated.
The Chancellor also announced new tax allowances for North Sea oil exploration, allowing an area west of the Shetlands to be developed. This will be welcomed by oil companies. New investment in fast broadband will bring some cities up to standards set in other countries and some railway lines in the north west of England will be upgraded. And the previously leaked relaxation of Sunday trading laws in England will also be brought in during the Olympics.
The government is taking child benefit away from higher earners next year, in a plan first announced at the Conservative party conference in 2010. But amid growing political disquiet – not least from David Cameron himself – Osborne has now tried to placate middle-class voters by softening the measure. He has lifted the limit to £50,000 instead of the initially proposed £43,000. And a tapering will mean that only those with an income of over £60,000 will lose all of their child benefit.
But this still leaves an anomaly where a family with two earners each on just under £50,000 will retain the benefit while a single parent earning £60,000 will lose it entirely. And many Tory MPs are worried that the move will primarily affect their party’s voters.
Osborne also said that tobacco tax would rise by 5% above inflation, adding 37p on 20 cigarettes, while tax on alcoholic drinks will also go up. The scheduled 3p rise in fuel duty in August will go ahead too.
A number of measures that were not technically part of this budget but have been previously announced will also have an impact on many people.
One of the biggest of these is the change in the tax credit regime which will require claimants to work for at least 24, instead of 16, hours a week. This will mean the loss of up to £4,000 per annum for some 212,000 families. The Employment Minister, Chris Grayling, has already admitted in the Commons that couples with children who will no longer qualify will see their income drop to £257 a week – £14 a week less than an equivalent family with no adult working.
George Osborne had been under some pressure from anti poverty organisations and campaigns to reverse these cuts – but by not doing so he made it obvious that his priorities lie elsewhere.
And if George Osborne had really wanted to put money into the pockets of the poorest families as well as giving consumer spending a shot in the arm, he could have taken Labour’s advice and cut VAT, which hits the
poorest hardest. The 20% VAT rate introduced by the coalition, despite Clegg and his party campaigning against such a move in the election campaign, has forced up the cost of many basic goods. And even those on which VAT is not actually paid have gone up because of increases to transport and other business costs.
Ed Miliband for Labour made perhaps his best speech since becoming Labour leader in reply. He attacked the “same old Tories” for having the wrong priorities and giving to the rich rather than helping those on lower incomes. He argued that 300,000 people would benefit from the top rate tax cuts, while only 4,000 or so would be likely to pay increased stamp duty on properties valued over £2M.
And, to great hilarity from opposition benches, he repeatedly asked how many of the Cabinet would personally benefit from the top rate tax cut.
Miliband highlighted the fact that hidden in the detail of the budget was the freezing of age-related tax allowances, and their abolition for anyone turning 65 after 5 April 2013, which will mean that 4.4m pensioners will be worse off next year.
He also attacked Nick Clegg and the Liberal Democrats for supporting the top rate tax cut and for believing that a Budget from George Osborne would do anything for working families.
“The fairness test for this Budget was whether the chancellor used every penny he could to help middle income families that are squeezed. He has failed that test,” said Miliband. “Wrong choices, wrong priorities, wrong values. Out of touch.”
So what will this budget achieve?
With unemployment is at its highest since the 1990s and over one million young people now out of work it will do little to help the economy. This was very much a case of Osborne sticking to his austerity plan, with more public sector spending cuts and nothing new to promote growth. There simply is no Plan B.
The economy is the number one political issue, especially in the current climate, and the Tories have long been rated as the party most trusted by the British public. So taking the unpopular decision to cut the top rate of tax at a time of cuts must be seen as something of a political gamble by the Tories. Even seen alongside the increased personal allowance, giving to those at the top is not a good message to send out. And the almost hidden cuts for pensioners may also come back to bite the Chancellor.
Will the budget pay off for George Osborne – or does it simply signal to the end of talk of us all being in this together?