UK Budget response

Winnie-the-Pooh had an excuse.  He was, self-avowedly, a Bear of Little Brain.  But even he, I am sure, would have seen the stupidity of some parts of our Mr Osborne’s budget.

Let me explain to our transatlantic friends.  In the UK we have a social payment called Child Benefit (we like the word ‘benefit’ it seems).  This fairly modest sum is paid weekly according to the number of children in a family.  It is usually paid directly to the mother under the principle that it is to support children.  It is worth £20.30 a week for the first child, and then £13.40 for each subsequent child.

Some time ago Mr Osborne suggested it should be removed in households where one parent was on higher rate taxation – that is they pay 40% tax on income about about £44,000 a year. Osborne suggested that it was unfair that someone on £30k would be paying taxes so that people on £100k would benefit but that is disingenuous – after all the higher earners also benefit from the tax-free income of about £9k which applies to everyone alike.  Why not remove tax-free bands from higher rate payers.

There were immediate protests about the unfairness of this.  In many cases there are two earners in a family and therefore if one earned £44,001 and the other didn’t work at all, they would lose the benefit while two earners both on £43,999 would not.  The argument was also made that, if this had to be changed then it should be based on joint income but all Osborne has done now is to change the cliff-edge into a very steep slope – people would lose all the benefit between £50 and £60k in 1% slices.  Big deal, George.

And what about families with more than one child?  We have a number of friends with 4 children.  In these cases, there is only one major earner because looking after that number of children is in itself a full-time job.  So they will lose £60 a week or £3000 a year.  Bear in mind this is not taxed so to recover this at 40% tax means there is a dead-band of at least £7,200 where you are poorer but paid more.

Worse, there is a technical difficulty because benefits are paid weekly while tax is levied in arrears.  We pay tax as we earn but it is cumulative during the year.  People’s earnings change so child benefit overpayment will be clawed back by the tax system but this can lead to very high marginal tax rates.  A family where the earner is promoted or changes their job towards the end of the tax year – even half way through – will be taxed so that they pay it all back by year end.  So they will be worse off for quite a time.  Why bother?

The simpler way would have been to make the child benefit generally taxable and increased it so that basic rate payers would not be worse off – and those who pay no tax would have been a bit better off.   But this was a little too much for Mr Osborne although I am sure that Winnie–the-Pooh would have understood this perfectly.

What other stupidities do we see?  Well the flat-lining of age allowances for pensioners will cost those who survive until 80 years old.  Yes, there will be no change to those already in receipt but it means that older people will have no extra allowances compared to their sprightly younger folk.  Shame on you, George.  Of course they may conveniently pass away soon but it seems rather petty to me.  I suppose this clearly won’t bother Mr Gideon Osborne (Baronet – and yes, that’s his real name).

Stamp duty is an easy one to tackle and paying a 7% tax (up from 5%) when you purchase your £2 million mansion (and 15% if you buy through a company which is one of the wheezes that the super-rich do) doesn’t affect most people.  Houses for rent are also generally well under that radar.  And the reduction of the 50% tax rate for those earning over £150k is a political gesture – ‘we are all in this together’ although it hasn’t been our fault in the first place.  But reducing tax rates on the very rich does not look good to those on middle income and below in these times of austerity.  Thanks again, George.

There are other issues – some good, some bad.  Putting money into wired cities is a good idea (but then we live in Manchester which will be one of the beneficiaries).   Tax relief for the games and high-end television industries is also welcome although I wonder whether the film industry will be included.  Putting 5% on cigarettes is neither here nor there as that addiction should be kicked anyway.

But I reserve my last blast for the increase in bank levy, a 0.105% tax on the reported equities and liabilities of the banks.  This has increased not because the banks are wonderfully healthy again but because the previous level did not generate the income that was predicted.  It is complex to estimate and subject to accountants moving entries on the balance sheet around.  While there are only 30 or 40 banks that it applies to (those with assets less than £20bn are excluded), these have substantial intellectual assets at their disposal – they are probably cleverer than the combined boffins at the Treasury.   The estimate is that the levy will raise some £2.5 billion.  Now yesterday I showed that the combined income from interest payments on created money – which is all effective profit – was about £60 billion.  Surely a better way can be found to ensure that the banks pay a fair whack.  Why not tax the generation of money?

9 thoughts on “UK Budget response”

  1. To be fair the cut off for losing child benefit was going to be £43,875 gross pay to lose all the benefit, which is a bit of a difference from £50,000 but a family with a joint income of £80,000 could have kept all of theirs. Personally I was just over the cut off and would have lost £1752.40 for the privilege of having worked hard in my profession. The outcome for us is better as long as I stay at my current level and don’t work hard to get promotion, congratulations Mr Osborne for dashing my future aspirations!

    1. @Dorastar: I fully sympathise with your sentiment – the arrangements for this are unjust, badly thought through and will result in different games so that individual income is below the treshold. These games are not really encouraging aspiration and work ethics. But then again, what can we expect from people who have never worked and have very little idea of how most people live? They work with numbers and foregt that ultimately these are about life and reality!

  2. @Dorastar – I was taking some licence in rounding the figures but I think you were going to lose CB on over £43k which has now increased to £50-60k. This is actual income and I gather does not include any personal allowance – I wasn’t sure when I wrote the post.

    In fact it will not be put into action until January 2013 and will just be clawed back via the tax system which still can mean that you could be promoted or change your job and end up substantially poorer.

    As you say, not good for aspiration. Taxing the CB is a much cleaner way of doing it. After all many other benefits like Job Seeker’s Allowance are already taxable. The only complication would be that couples would need to elect which parent receives and is then taxed on the Child Benefit.

  3. Govts have always cared less about common man. I feel they only worry about a small section of privileged people. I can understand your pain.

    If Ministers are not efficient and dumb, I don’t believe there bureaucrats are. They intentionally do this. In India its similar story. They don’t pay allowances here but just can’t control the prices.

    1. Hi @Karunesh – great to see you!

      I suspect you are right – governments are the same everywhere. They only want to know you at election time and even then it is a matter of voting for the least worst candidate…. :sad:

      Oh well.

      At least we can vote, even if it doesn’t make much difference. :razz:

  4. Not sure on whether it is on actual net income as I just squeeze into the higher tax bracket on my wages so surely that’s on gross income so actually the cut off when it was 43k was for people who brought home 43kgross then minus their tax so effectively much lower than 43k (I know what I mean even if I can’t get it across in English sorry)
    I did write to my MP when it was first suggested and pointed out that education pay scales for management and police force all mean we are on the same 40k bracket (and we have no alternative because of the need for pay differentials) So effectively they were saying well done for working hard and taking on extra responsibility now lose some £ as the reward! The treasury reply was “we know”

  5. @Dorastar – it’s not on net income at all. It is all on income before tax and National Insurance.

    The original proposal was to withdraw for people in the higher tax bracket, which (if they have a standard tax code) would have been £42475 gross (before tax) in 11/12 or £41450 gross before tax in 12/13. Osborne has now said that the withdrawal of CB will occur at £50000 gross with a 1% reduction for every £100 so that it will all be withdrawn by £60000.

    These are not of course very high incomes at all but at least he has increased it and made it a slope rather than a cliff-edge. The high rate was actually being reduced anyway! Previously these tax bands were index linked but that seems to have gone out of the window.

    This will be effected in January 2013 so you have a little while to enjoy CB yet.

    As it happens (see tonight’s post) I was talking to the CB office today to clarify the issue.

    HTH.

  6. Pingback: Friday grapevine: best of the blogs - TotallyMoney

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