Budget reaction from CentreForum

21 March 2012

Commenting on today's Budget statement, CentreForum chief executive, Chris Nicholson, said:

"There was little of surprise in the Budget. The continuing poor state of the UK economy prevents any big giveaways.

The increase in the personal tax allowance next year is very welcome as is the clampdown on tax reliefs and loopholes for the wealthy. But there are several missed opportunities - particularly the failure to remove higher rate tax relief on pension contributions and tax the pension tax free lump sum.

Frustratingly, the way in which the 50p tax rate was introduced and then reduced will not help answer the question as to whether it would have raised extra revenue. By announcing its introduction and removal in advance the government has guaranteed that it will raise the minimum amount of money"

CentreForum's chief economist, Tim Leunig made the following observations about the Chancellor's speech:

The office of budget responsibility forecast for this year whilst higher is still terrible: growth of less than 1%, with a recovery next year and the year after. The problem is we've heard that before, and there must be a very high chance that it will be revised later this year or this time next year. The reality is that no one has much of a clue when Britain will start to grow properly again. Unemployment is expected to peak this year, and falls slightly thereafter.

The budget deficit remains high (2011-12 £126bn), and it will not fall much next year (£120bn). The Chancellor is more optimistic beyond that, but this must depend on the state of the economy.

The automatic review of the pension age is very sensible. The government should have done this years ago.

More bungs to housebuilders are not what Britain needs. We need proper reform of the planning system so that developers do not see planning permissions as an asset that will only rise in value over time.

The Chancellor declares that "gas is cheap", which is true in the United States, but rather less true in Europe, where gas prices are usually pegged to oil prices. An area of difference bewteen Lib Dem and Conservatives. 

NPPF to be published on Tuesday: the Chancellor promises a big reduction in red tape, but there is no detail here.

Very sensible claim by George Osborne that education has a bigger long-term effect on the future of the economy than any budget can ever do. Best line in the budget so far.

Regional pay: it looks as though it will be introduced very gently. A sensible small step forward.

The cash value of the additional pensioners allowance has been frozen, and it will no longer go to future pensioners. Sensible change to make fairer the burden of taxation between pensioners and others

Citizens pension of £140 per person per week, for future pensioners, but to be introduced on a revenue neutral basis. There must be some losers there as well as winners, and the losers are presumably the people who paid in to the various states special pension scheme over the years.

Since corporation tax is already radically lower than it is in say the United States, it's hard to imagine that an extra 1% off corporation tax is really going to make much difference. Costs £400 million. 

Fuel duty will only increase if oil comes down a long way: it's currently about $50 a barrel above the threshold just announced.

It looks as though the stamp duty housing loophole has been well and truly closed.

But the 7% stamp duty on purchasing properties over £2 million is a poor short term fix. It isn't a wealth tax, since it only applies at most once, and taxes on transactions are generally bad ideas. Government should have bitten the bullet and introduced a "mansion tax" or even better gone ahead with extra Council tax bands and longer term revaluation.

Surprising and disappointing not to see any changes to pension tax relief. That would be a real money spinner.

Loopholes are capped, although it's not clear from the speech exactly what is being capped, or how important this is in terms of revenue raised.

The Chancellor declares that £16billion was deliberately shifted into the previous tax year to avoid the 50p band. By announcing a future cut in the top rate of tax the Chancellor will guarantee a deliberate shift of income into the subsequent tax year, hitting public finances in the short run. It is very hard therefore to know whether the 50p rate is made permanent would have raised a decent amount of money.

The OBR claim that closing tax loopholes raises five times as much as the cut in the 50p rate, but it's not clear from the speech whether the valuation used for the 50p band included or excluded people moving income from one year to another. There will be a lot to look at in the small print here. 

Chancellor abolishes the cliff edge for child benefit, but the cost to the Exchequer of doing so must be very high, and it appears that the Chancellor has created a completely new means testing system. That looks like a terrible way to save the Prime Minister's blushes.

The personal allowance is increased by £1100, to £9205. This is ahead of schedule, although higher inflation since the election means that it is not quite as far ahead of schedule as the headline numbers appear. The halving of income tax for people on minimum wage is to be welcomed: this is a pro-employment measure as much as a progressive one.

Budget 2012: tax credits versus personal tax allowances

19 March 2012

In the countdown to the Budget a major area of disagreement has emerged over the best way to help low and middle income earners. The government wants to raise the income tax personal allowance towards £10,000, whereas the opposition want to increase tax credits.

So who is right?

That is the question explored by CentreForum in a new report out on Monday. The report includes analysis from Howard Reed of Landman Economics, who makes the case for increasing tax credits, and from Tom Brooks and Chris Nicholson of CentreForum, who argue for increasing personal tax allowances.

The report looks at ways to raise additional revenue of almost £12 billion before testing the two approaches to distributing this benefit to taxpayers.(1) It has been published as a contribution to the work of Resolution Foundation's Commission on Living Standards.

Chief executive of CentreForum Chris Nicholson said

"This is an important part of the debate between the government and opposition. We hope that this report helps policymakers identify the facts and choices. Our analysis sheds light on the main points of disagreement."

"In our view there is a danger that discussion of this issue focuses too much on simple comparisons of immediate distributional impacts. We need to look also at incentives for second earners in a household to get a job and for people to work more hours. It is better in the long term for people to get a hand up, not just a hand out. The best way to do that is by increasing the personal tax allowance."

Director of Landman Economics Howard Reed said:

"The analysis in this report clearly demonstrates that increasing tax credits for working low income families is the best targeted way of encouraging work among lone parents and workless couples. The problem with raising the income tax allowance is most of the gain goes to families who aren't very poor in the first place."

NOTES

The CentreForum report 'Taxing decisions: the debate between tax credits and personal tax allowances' can be downloaded.

• The analysis identifies almost £12 billion of revenue raising measures including abolishing higher rate tax relief on pension contributions (£7bn), limiting pension tax free lump sums (£0.5bn), increasing capital gains tax to align with income tax (£1bn), limiting some pensioner benefits eg winter fuel allowance (£1.7bn), a mansion tax (£1.7bn).
• Both sets of analysis contain concrete proposals which could be introduced cost neutral immediately in the Budget.
• CentreForum proposes that both income tax and national insurance allowances are increased to £10,000. This would boost the income of every basic rate taxpayer in 2012-13 by £840 compared to their incomes in 2011-12. It would also take 1 million individuals out of tax altogether.
• Landman Economics proposes increases in the per child element of child tax credit (£810), the basic element of working tax credit (by £770), and support for childcare (from 70 per cent to 95 per cent of eligible childcare costs). This would increase the disposable annual income of average low to middle income households by £1,200.
• The pre-Budget report also offers longer term recommendations which could be introduced in the coming years to deliver a fairer tax system.
• CentreForum shows how personal allowances for income tax could be increased to a level (£12,500) that would ensure no individuals working on the national minimum wage pay any income tax.
• Landman Economics proposes an even greater increase in the personal tax allowance, to £20,000, with a subsequent flat rate of income tax at 40 per cent. This would make low and middle earners better off and the tax system more simple and progressive .