Wednesday 23 June 2010

The first coalition budget

In the bad old days of Brown’s budgets, and to a lesser extent Darling’s, it was a mistake to comment too soon because the problems were always hidden in the small print released afterwards. George Osborne has admirably been straight with his presentation so it is easy to see the impact quickly.

The headline comments have been about the increase in VAT to 20%; the headline criticisms that this and the cutbacks will damage the economic recovery and impact poorer people more.

I think there are more points of underlying importance than this:
- The budget has started to get to grips with our budget deficit. As I said earlier, it is so big that interest costs are a major outflow from the economy – and a growing part of the deficit. Early action matters, and the quick next day assessment of the budget by the gilt market was good; the UK’s funding costs have reduced slightly.

- Some of the apparently softer cuts will have a big impact on the deficit: a two year restriction on public sector pay increases –with none for employees earning over £21,000 – and increasing benefits by the CPI rather than RPI will save a lot of money quickly.

- The budget sets a positive direction for businesses in terms of tax reduction and simplification. The most important way we will get out of the current mess is for the private sector to grow. Lower and simpler taxes help confidence. This is the first budget for years to have an approach of freeing the private sector rather than tinkering with it.

I think the criticisms are overstated. The VAT rate will not increase until January 2011, which gives time for the confidence boosting measures to work; it is also likely to bring forward spending to benefit the economy in 2010. Less wealthy people tend to spend a greater proportion of their income on non-vatable goods, and so it is less regressive than you might think. In addition, there are specific measures (tax thresholds; housing benefits) targeted at the poor.

I think the main criticism is that the details of the tax cuts are still to come, in the Autumn expenditure review. This delay is inevitable but still permits uncertainty till then.

Overall, it is refreshing to have a budget that is transparent, focused on sorting out the problems and giving an optimistic direction for private sector growth.

Tuesday 1 June 2010

Capital: A Tax on Gains

I don't understand the fuss being made about an increase in capital gains tax - or rather I do, I piut it down to mischevious Tories trying to spoil the coalition. I would exempt people like John Redwood making constructive comments about to improve the situation.

The fact that capital gains are taxed at a very different rate from income is very new - it was brought in in 2008, mainly to help some of Gordon Brown's main funders. Nigel Lawson, as part of his tax simplification process, had equalised the rates. This remained the case for over 20 years. There were allowances for the time the asset was held, and some exemptions for entrepreneurial assets.

Those protesting against the increase mainly focus on two issues:
Some research suggests that lower rates bring in more money. However, this is not conclusive as small changes probably don't effect behaviour and wider economic trends have at least as much impact.

The special pleading about middle class second home owners and shareholders is too self serving. Firstly, more tax on gains on such assets is no hardship. Second, if they were bought pre-2008 they were bought under a regime where income and capital tax rates were the same. So the proposed change is no change. If they were bought after 2008 then (in most cases) there will have been minimal gains if not losses so people can readjust their savings now without any serious penalty.

The different rates have caused a big tax avoidance industry to try to turn income into capital. This is both unfair and unproductive. We should want the tax system to be simpler, and harmonising rates is the way to go. I do think it is fair to differentiate some business assets and to encourage saving by having reliefs according to how long assets are held. But these are the points that Tories should focus on (as Redwood has), and we should be grateful the Lib Dems have suggested rate harmonisation. This fits our principles.

Again, I see this as jealous Tories stirring for the sake of it.