UK budget 2014

budget2014 UK budget 2014Yesterday’s UK budget has been heralded as one for bingo-playing baby boomers. Why?  And what about the rest of the population?

Budget commentators

As Joshua Raymond, Chief Marketing Strategist at City Index, commented for The Money Principle:

“There are some decisions in here which are clearly aimed at next year’s election. The rise in personal allowance to £10,500 and the threshold for 40p tax payers is aimed at giving the Tory party a pre-emptive attack on Labour ahead of next years election. It’s a clever move and puts them ahead of the curve on tax relief for middle earners before Labour has a platform to do so.

The revisions to both borrowing and GDP were broadly expected and so gave no surprise to the markets.

The bigger than expected cut in bingo tax was unexpected also, whilst at the same time, we saw investors sell out of Ladbrokes and William Hill shares, which both slumped as an immediate consequence of the increase in betting machine tax. Hargreaves Lansdown shares enjoyed higher demand thanks to the changes to ISA’s.”

Or as noted in Tim Harford’s Undercover Economist column in the Financial Times this morning, it is political.

Politics

It is designed to please those near retirement and those with money to spare.  Such people are more inclined to vote Conservative (Tory) but could end up voting for UKIP, the party which wants to withdraw from the European Union and a major threat to the Tories.

The increase in ISA limit only affects those with £15k or so to salt away per year – cash and equity ISAs are merged.

There are some welcome relaxations for business, changes to taxes on high-valued houses owned via a company (although not, it has to be noted, where owned by non-resident individuals) and higher taxes on high-stakes gambling machines, the City of London excepted (:)).

The Rest

But the budget does almost nothing for most other people, particularly for the young, the not quite so young and the poor.

It does nothing to help people off welfare and into work – in fact quite the opposite with the Welfare Cap.

Of course they are less likely to vote, in particular to vote Tory.

It does only a little for children. The new childcare support is to get parents back to work and paying tax, not help for parents who elect to stay at home to be with their children.

And do people on £300,000 a year really need help with their child care?  Somehow I doubt it.

It does nothing for education and only some tokenism for science, welcome though that is – more money for graphene and some money to commemorate Alan Turing.

There will be some relief for long distance air travellers but most flights are less than 2000 miles and won’t be affected.

It’s surprising what some floods in the Home Counties will do – now there is £340 million pledged towards flood defences and potholes.

The Chancellor trumpeted the 5% increase in personal tax allowance (not until April 2015) but ignored the inequitable National Insurance levy (ie tax) which increases only by 2.7% this year.  NI is not insignificant; it raises 19% or so of government income, more than VAT and second only to income tax at 29%.

Pensions

Now I have some sympathy with pensioners trying to get their pots out so half a hurrah for that. Pension providers have been taking their clients for a ride for some time.

When annuity rates were rather better, this was not so evident but the lower rates, driven by low interest rates and the realisation that people are living longer, have highlighted the cushy fees taken.

Anything that helps is welcome – and enabling people to take charge of their pension funds has two benefits.

  1. People can avoid the silly charges made – there are many alternatives if you have a substantial lump sum.   As a result, the share price of a number of pension fund managers as the prospect of losing this nice earner is removed – although I suspect that the market has over-reacted on this.
  2. It is likely to bring tax revenues forward as people spend more in their earlier years of retirement – new car while they can drive, repairs to the house etc, a new TV at long last bought.
As they get older, some folk may need residential care but funding for that may come from accumulated property value rather than a pension and anyway it is tomorrow’s problem.

The sad fact about the pension changes is also that it has been done as a party political decision.

I suspect it will be backed by the opposition Labour party but it would have been better if the overall changes were subject to all-party agreement before.

Pensions are things that last a lifetime – literally – either when building up or when drawing down.

Conclusions

In sum, despite the claims to the contrary, this budget is nothing to do with the economy and growth but everything to do with politics.

If you want growth in the economy, give money to the poor.

They don’t save it, they spend it to feed and house themselves so it goes back into circulation.  They have no choice.

Giving money to those already reasonably well heeled, or enabling them to keep money tax free or access their pension funds, means that they splash out on their next yacht, imported luxury or holiday home.

It doesn’t enter the economy at all, in fact it is withdrawn from the economy.

Then there are the much more numerous ‘squeezed middle’ who will benefit and can only dream of a yacht.

These are Osborne’s real target.

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