This is a Budget for the squeezed middle, but the jury's still out on whether it's a budget for growth.
By Chris Nicholson
On Monday I argued that we needed a budget for growth and the squeezed middle. So how did the actual Budget shape up?
Well, there was definitely further help for low and middle income earners with the largest ever increase in the personal tax allowance. This will now rise to over £9200 in 2013. This is a huge step forward in the Liberal Democrat's aim to raise the personal tax threshold to £10,000 and beyond by the time of the next election. Taking millions of working people out of tax altogether is a major step towards greater fairness in the tax system.
But this has been overshadowed by the furore over the "granny tax" – the freezing of the additional personal tax allowance for existing pensioners and its withdrawal for new pensioners.
That is a pity. Pensioners have so far been relatively protected by the coalition government from the effects of austerity and will receive a large state pension increase this year. Moreover as my CentreForum colleague Tim Leunig has argued, pensioners are relatively lightly taxed compared to those of working age.
Someone of working age who receives £25,000 a year, around the median income, pays £5500 in income tax and National Insurance currently compared to just £1,900 for someone who is a pensioner on a similar income (after imputing an annual value of the tax free pension lump sum). How can that be justified?
This change makes a small step in redressing the balance. As David Willetts has argued in "The Pinch: how the baby boomers stole their children's future" the baby boomer generation has benefited disproportionately at the expense of younger generations. Willetts estimates that they have taken out of the welfare state almost 20% more than they will have put in.
With the tax changes, no pensioner will be worse off in cash terms and the rapid increase in the personal tax allowance will mean they only "lose out" in relative rather than absolute terms. The current tax system is unfair in how it treats those of working age compared to pensioners. This small change starts to redress the balance.
Probably as controversial has been to decision to drop the top rate of tax to 45p. The government has gone to considerable lengths to try to cut back on tax reliefs and tax loopholes for the wealthy but it is the cut in the top tax rate to 45p that has received the attention.
One has to be rather sceptical about the chancellor's figures for how little the 50p tax rate has raised. The Labour government announcing over a year in advance the introduction of the 50p rate and George Osborne announcing a year in advance its reduction to 45p is guaranteed to minimise the revenue from the 50p rate. Taxpayers have been able to bring forward or delay their taxable income to minimise the tax take. It would be difficult to think of a more ineffective way to impose a tax.
In the medium and long term the cut in the top rate of tax is the right thing to do. However the politics of it are dreadful.
Whilst the Budget has gone a long way to help the squeezed middle it is far less clear that this is a Budget for growth. Hopes have been raised of relaxation in planning controls to enable more housebuilding, greater investment in infrastructure and help to boost employee ownership and so economic performance. But the details are sadly lacking. There are some worrying signs of a Gordon Brown like tendency to re-announce programmes to give the impression of progress – the third announcement of Community Land Auction pilots being a case in point.
One would have more confidence if there were greater evidence of a clear strategy for growth. But as Vince Cable recently noted in a leaked letter to the prime minister that is so far lacking. The fear of some is that there is no sign of it because the chancellor does not believe in an industrial strategy. If that is the case there is clearly much that Vince Cable and Lord Heseltine, in his new role examining how the public sector can work with the private sector to boost economic development, have still to do.
A budget for the squeezed middle – yes. A budget for growth – the jury is still out.
Chris Nicholson is chief executive of CentreForum, the liberal think tank
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