Like anyone over 30, I’ve pretty much given up on politicians doing what they say they will. The emergency budget from George Osborne is therefore a surprise.
Here is the bold plan we were promised to do the unpopular to eliminate most of the deficit by 2015.
Here are the big cuts in public profligacy, with 77% of the savings to come from spending cuts rather than higher taxes.
And the pain has been fairly broadly spread, too. The poor are seeing benefits curtailed, the middle classes will pay more tax, and the Queen faces a frozen civil list.
True, the poorest will be hit proportionally as hard as the richest. But this is not a reflection of the Conservative party’s secret inner Himler, as Labour will suggest over the next few days. Rather, it’s a line in the sand against redistribution – an attempt to make work pay.
If solving the problems of the underclass was as simple as throwing money at it, I’d be all for it. But it’s not – in fact, one lesson of the past few years is that state money can make things worse. Nightmarish scenarios where people are kept on benefits by effective marginal tax rates of over 100% if they take a job and lose tax credits are an insanity.
A welfare safety net is meant to catch you when you fall, not keep you trapped when you try to climb higher.
The sensible Lib Dem policy that the Conservatives have adopted of aspiring to remove income tax on those earning up to £10,000 is a step towards making work pay, too. But you have to be in work to gain from it.
Will the spending cuts hurt growth? I believe that the UK will recover sufficiently to shrug off the impact, particularly as interest rates will now stay lower for longer. Gilt yields should remain restrained, and inflation subdued as workers jettisoned from the public sector keep wages lower in the private sector
As an advocate of free markets, I also happen to believe the private sector will allocate these incoming workers more efficiently than the Government did, and so in time boost UK productivity.
There are huge execution risks, of course. Taking 25% out of Government spending must be done with surgical precision if the patient is to leave the sick bay in better shape than he came in.
What about investors?
Turning from the fate of the UK economy to the narrower pursuit of our own attempts to get filthy rich gain financial freedom, this wasn’t a bad budget for us investors.
True, that relief comes from the ‘nil-nil – could have been worse’ school of thought that’s currently holding sway in the England football camp.
We were warned we might face 40% capital gains tax, and see the annual allowance slashed to just £2,000. As it is the CGT rate remains 18% for lower-rate payers, while higher earners will pay 28%. Best of all, the £10,100 annual CGT allowance remains in place, albeit frozen.
The net result is that by religiously using ISAs and intelligently realising our gains, most Monevator readers will be able to avoid capital gains tax on their share portfolios.
Property investors are a different kettle of kippers. Most disposals of older investment properties will be hit by a capital gain, and it’s likely to be sufficient to move them into the 28% bracket for a year, even if they’re usually lower-rate payers.
But I can’t wring my hands at this. It’s unfortunate that the rules have changed, but we face a property shortage in this country and prices are too high. And retaining 72% of your gains from the biggest property bubble the UK has ever seen is not a bad deal. Property owners have also enjoyed a windfall gain from extraordinarily low interest rates, so it’s swings and roundabouts.
Finally, there’s a hidden treat for investors – and start-up entrepreneuers – in the shape of lower corporation taxes.
Small businesses will see corporation tax fall back to 20% from 21%, which is handy if you’re a freelancer like me.
General corporation is to drop by a penny a year for four years, from 28% to 24%. This article from The Motley Fool reasonably suggests that should mean more profitable UK companies and maybe even higher dividends for investors.
Emergency budget or suicide note?
Back in October I wrote that David Cameron’s Curse was to save the UK and be hated for it. Courtesy of his best chum George Osborne, the saving – and the hating – has begun.
Unfortunately, people tend to remember the good times, and discount what never happened. Gordon Brown broke his own Golden Rule over the cycle to the tune of £485 billion, yet silly Labour propaganda has it that we’re in this mess from bailing out the banks.
We’ll almost certainly eventually make a vast profit on our stakes in the banks, and I think we’ll be better off in the long run from this budget, too.
So well done for now, George. You’d better take my praise for this emergency budget, because in a year’s time there’ll be little enough from elsewhere.
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Hear hear! I am so chuffed that I’ll no longer be sponsoring my colleagues’ children. Indeed, the whole benefits panjandrum needed sorting. I hadn’t realised it had got so entrenched!
The one area I think Osborne failed dismally is in looking for a way to help youth unemployment, if necessary by reducing employer NI for taking young ‘uns on up to a certain age. These poor guys are taking the hit straight between the eyes in this recession, and if the fiscal retrenchment increases unemployment they’ll take a gut-punch in the coming years too 🙁
.-= ermine on: UK Budget June 2010 ruminations, thoughts and rants =-.
(disclaimer: I’m not from the UK, so I could be misinformed)
A whole article hailing the budget cuts and no mention of the infernal VAT rise? Taxing consumption when you want growth is, to put it mildly, stupid.
Not too mention the fact that this will impact the middle and lower classes more than anyone else, because they have to spend more on ‘primary goods’
@ermine – True, I worry about the young too but I am sick to the back teeth of Government thinking it’s the solution to everything. Unfortunately this is a time to get out of the way. If they’d cut something else by 30% to do more for young people though, I wouldn’t have argued. I guess reversing the NI employer rise helps. There’s a mild tax rebate too for new hiring.
@jeroen – Well, it was very difficult to decide what to cover and what not to without just adding to the waffle. I’m not wildly against a VAT rise though, given taxes had to go up from somewhere. People in general spend too much. I’d rather be allowed to keep more of money, and to salt it away. Also, it’s true the poorer pay more proportionally for VAT but equally more of their outgoings that matter are VAT free (e.g. Food and children’s clothes).
Agree it’s not perfect, but better than income tax rises, for instance, in my view.
Well, if history shows us anything, economic growth is the best way to lower debt/GDP. Any cuts should be made very carefully as to not halt growth and bring on the dreaded Double Dip.
Don’t get me wrong, I would fully support a VAT rise if it was postponed until we are sure the recession is over. I think that January 2011 is too soon. I hope I’m wrong, though.
BTW: you guys should count yourself lucky to get any kind of budget cuts. Over here (Belgium) we need a similar austerity program, but our next PM is probably going to be a socialist. And we’re already the highest taxed country in Europe. *sigh*
@jeroen – Bad luck! On the other hand, you do have some of the nicest bars. I think Brussels is very under-rated for the civilised European. 🙂
One thing that caught my eye was the change from Air Passenger Duty from per-person to per-plane. Hopefully this will prevent ghost flights and encourage airlines to have fuller flights (and hence reduce taxes on us poor passengers)
.-= PassportPete on: The Budget 2010: How it affects travellers =-.
“The sensible Lib Dem policy that the Conservatives have adopted of aspiring to remove income tax on those earning up to £10,000 is a step towards making work pay, too. But you have to be in work to gain from it.”
That kind of suggests what the policy should really be. Everybody doing ‘work’ gets the state pension pro-rata the hours they work – as well as pensioners and those genuinely unable to work for acceptable reasons.
work amounts would be validated by employers, and where charities and social enterprises provide insufficient voluntary positions, the state will create those positions so that nobody who wants to work is without something to do of value.
That pension would then be at a sensible minimum living level that ensures they are out of poverty.
Then you can scrap personal allowances, minimum wages, national insurance, income support, unemployment benefit, sick pay, maternity pay and all the rest of the paraphernalia tying up business in red tape. Business employment becomes a near free market and because income tax is just a percentage and is charged on the *profit* you make from working (ex student loan interest, travel costs and all the other things self-employed people have claimed for years), work should always pay.
A good article thread on The Fool if anybody has missed it: http://www.fool.co.uk/news/investing/2010/06/22/the-land-of-perfect-taxes.aspx
We can dream.
.-= Neil Wilson on: A primer on Modern Monetary Theory (MMT) =-.
Never thought I’d see a budget quite like this one… S’pose the proof the coalition is working is that EVERYONE seems mildly peeved. Nothing in there for the vote-riggers in the Labour ranks to cheer though… if they were intellectually honest theyd be overjoyed to see 900K fewer people paying income tax but we know they’d prefer to achieve that via gubmint sweeties and handouts.
If Mr Monevator is right and it seems everyone else is wrong and the economy does build up a head then perhaps tax cuts in a year or two? Stranger things have happened… this five year cycle could be just the ticket for the Tories if you think about it.
Well, for the second time with this coalition, I have been pleasantly surprised.
The one fact that emerged which really gobsmacked me was the Housing Benefit figures — obviously, if they are introducing a £400 a week limit, then that means some are in receipt of more. That’s more than my weekly wage, from which I have to fund my housing, eating, transport …. everything! And they are paying people £400 a WEEK just for housing??? Where is the incentive to work? Gah, it’s enough to drive me into reading the Daily Mail!
[/rant]
In more measured tones, I strongly suggest that there should be a cap on all benefits which is equivalent to a 40-hour workweek on minimum wage. I’m sure that would help to focus the mind towards work being more rewarding than not.
I think the VAT is fair enough (and a hidden subsidy to the education budget as Maths GCSE just got a whole load easier to teach 🙂 ) Most VATable items are still pretty much discretionary spending, fuel etc stays at 5%, and a 2.1% price increase isn’t major as witnessed by the temporary 15% debacle. My big beef is that muggins here will get the job of updating all the company’s systems as no-one else in the building seems capable of using a context-driven menu 😉
Strikes me that Labour have played their cards extremely well here. They refused to talk about specific cuts before the election, so now the cuts come along and they are “Tory cuts”. My friends in the public-sector are already up in arms about the Tories making them pay for the “bankers’ mistakes”. So many have become so deeply ingrained with the socialist/statist ideals.
The next few years could be really, really rough.
@Lemondy – Labour may have played their cards right, but I’d feel a bit squeamish using that deck. It’s truly awful how they’re able to blame ‘the bankers’ on this (goodness knows I’m no fan of their antics) when a quick glance at the figures shows Brown spending well in excess of income well before the downturn (which was always coming one way or another).
Re: Things getting tough, have to admit Connaught’s profit warning has given me the willies a bit. Will Stock Tickle it later.
@Macs – I agree. Lots of stuff in the London papers about how families will be forced to move out of Georgian terraces in Islington now. Articles arguing it ‘increases social inequality’. Funny, I thought housing benefit was to stop blameless kids and vulnerable OAPs living in slums, not a bung to further socialist redistributive ideals. Call me cynical…
@OldPro – Hmm, I certainly wouldn’t go so far as expecting tax cuts in a year or two! Maybe in 4-5 years though.
@Neil – A good summary of the nirvana of a flat tax and a ‘citizen’s age’. My father first suggested the latter to me when I was very young… I think he hoped I’d eventually grow up to be a person of influence? Regardless, it’s an old idea as I’m sure you’re aware, of course.
I spent a few hours looking into it for a post I never wrote a while back. I can’t remember what the anti-case was – think some combination of incentives, inflation, and weird edge effects. Perhaps I’ll be inspired by your post to have another look at it it. Cheers!
@PassportPete – Yes, the old system was crazy. I would be quite happy to see short-haul air travel made aspirational again. It would be terrible if I couldn’t go to Italy or Slovenia or wherever, but I’m not convinced I need to be able to do it for £50 to go on a bender for 48 hours.