Like anyone over 30, I’ve pretty much given up on politicians doing what they say they will. The emergency budget [1] 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 [2] 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 [3], 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 [4] and intelligently realising our gains, most Monevator readers will be able to avoid capital gains tax [5] on their share portfolios [6].
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 [7] 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 [8] 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 [9] 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 [10], 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.