Media Release

Budget 2012: Response from the Social Market Foundation

Today’s budget was an exercise in fiscally neutral tinkering, with much of the statement focused on delivering the savings needed to offset the Government’s give-aways. Overall, bold plans to raise the income tax personal allowance, soften the blow of child benefit withdrawal, and further cut the corporation tax main rate were mainly funded by a raid on pensioners’ tax allowances, more revenue from company cars, a higher bank levy, and closing VAT loopholes . Despite these moves, the Budget will have no significant impact on economic output.

With the OBR pointing to no real change in its estimate of the size of the permanent fiscal hole since last November’s massive downgrade, the Government remains tight-lipped about where it plans to find the £15bn of fiscal consolidation required by 2016. This represents a missed opportunity for an immediate and fiscally neutral stimulus package, as proposed by the SMF in its recent paper Osborne’s Choice, which would provide a real boost to the economy. Only time will tell how big a gamble the ‘steady as she goes’ policy really is.

OBR outlook

Overview: The Office for Budget Responsibility forecast remains broadly the same as in November 2011, with a minimal GDP growth of 0.8% this year, rising to 2% next year and 3.0% by 2015-16. Unemployment will peak at 1.67m this year.

Ian Mulheirn, Director of the Social Market Foundation said:

“While the Office for Budget Responsibility has slightly revised up the UK growth forecast for 2012, and down for 2013, the outlook remains worrying. The £15bn of additional cuts or tax rises that have to be made by 2016-17 to eliminate the structural deficit are still looming.  But setting out the details of these imminent cuts in the run up to an election won’t make good politics or good economics. The Chancellor should today have brought forward the £15bn of cuts by axing low-growth policies like the winter fuel allowance and capping maximum ISA holdings, and recycled the savings into infrastructure to give the economy a much-needed £50bn stimulus over four years. “

Child benefit

Overview: The Government will withdraw child benefit for higher rate taxpayers from next January. The Chancellor announced complete removal of benefits for those earning over £60,000 with gradual removal between £50,000 and £60,000.

Ian Mulheirn, Director of the SMF said:

“Reversing the problems caused by the hastily announced child benefit cut eighteen months ago has come with a £690m price tag. By introducing a child benefit taper for higher rate taxpayers, the chancellor has bought off a large chunk of the squeezed middle and solved the ‘cliff-edge’ problem posed by immediate withdrawal at the higher rate tax threshold.

But this doesn’t tackle the fairness issue. Families with two earners just below the threshold will still be eligible for the benefit, while families with two children and earnings of between £50,000 and £60,000 will face a 17.5 percentage point rise in their effective tax rate. After income tax and National Insurance Contributions, a family with three children would see £1 in every £3 extra earned.  A neater way around this problem would be to roll the benefit into the Universal Credit, a ready-made system for allocating benefits fairly, according to total family income.”

Age-related allowances

Overview: The Chancellor has frozen the age-related allowances for pensioners until they reach parity with the working age personal allowance, saving around £1.25bn by 2016. Pensioners born after 1948 will stay on the main personal allowance.

Ian Mulheirn, Director of the SMF said:

“The so-called granny tax is a bold move in the right direction by the Chancellor. It sends a clear signal that young and working age people cannot be expected to shoulder the entire burden of this huge deficit reduction. As Mr Osborne contemplates the sources of the extra £10bn of welfare cuts he seeks by 2016, he should look to cut other hand-outs to better-off pensioners – the wealthiest group in society – such as winter fuel payments, free bus travel and TV licenses.”

Personal allowance

Overview: The income tax personal allowance will be raised by the largest ever increase, to £9,205 from April 2013. This will take over 2 million of the lowest paid out of income tax and put £220 per year into the pockets of anyone earning more than £9,205.

Ian Mulheirn said: 

“While raising the personal allowance is good news for anyone earning above £9,205, it does little to help those on the lowest incomes. For low-paid families who do benefit, the freezes to the Working Tax Credit announced at the Spending Review and Autumn Statement will effectively wipe out most of the gains from this change. With the economy in the doldrums and investment weak, this £14bn tax break over the next five years would be much better spent on growth enhancing measures like infrastructure investment.”

50p tax

Overview: The Chancellor will replace the 50p additional tax rate on income with a new 45p rate from April 2013.

Ian Mulheirn said:

“The OBR’s analysis suggests that an income tax top rate of 48p would maximise tax revenue. While a cut to 40p would have been hard to justify, the reduction from 50p makes sense from an economic efficiency perspective without making the tax system significantly less progressive. But despite talk of a further reduction in the top rate, the fact that it will soon be significantly below the revenue maximising level suggests that 45p may be here to stay.”



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