Karen Rowlingson assesses how income tax changes will affect the worst off in society
Rumour has it that the coalition government will announce, in this budget, that the personal allowance for income tax will be increased ‘towards £11,000’. The current allowance for most people is £10,000 – up from £9,440 in 2013-14 – and as a result of previous budgets it is already due to rise to £10,600 next month. This increase will mean that some 24.4 million people will pay less tax from next month, while a further 430,000 will no longer pay any income tax in 2015-16.
A further increase in the allowance to £11,000 might be seen as a way of tackling the squeeze on living standards and growth of in-work poverty that has occurred over recent years. But, at a cost of nearly £2.7 billion, is this the best way to help people on low incomes?
Clearly those who have already been taken out of income tax altogether by previous reforms will see no further gain from raising the threshold still higher. If the aim of the policy is to increase the incomes of these people then it will achieve nothing.
Furthermore, tax policy needs to be considered alongside wages, tax credits and benefits, and the cost of living. Together, these factors determine a family’s standard of living. In the past five or more years, wages have stagnated, tax credits have been cut, and living costs have increased (albeit inflation has recently come down significantly). Increases to the tax threshold may have helped people somewhat, but they have not been enough to maintain people’s living standards over this time. The arrival of Universal Credit will further complicate the picture and blunt the benefit of tax cuts.
Income tax cuts clearly have an important role in relation to supporting people on low incomes, but interactions with the benefit and tax credit system also need to be considered before assuming they will benefit those whose tax is reduced. And these tax cuts do nothing for the poorest, whose income is already so low that they do not pay income tax currently.
Professor Karen Rowlingson, Professor of Social Policy
Andy Lymer looks at what the Chancellor can offer voters in this pre-election Budget
With the General Election only weeks away, this is the last budget of the current coalition. It is likely, therefore, to be a budget that will give away rather than take away. Positive economic news has, in the main, outweighed the negative recently, so the Chancellor is likely to play the ‘see what a good job we are doing’ card and give a little away in this budget – even though this Government has not delivered its goal of balancing its budget in this Parliament by a long shot.
What will he give away, then? I would expect that the basic personal allowance we all get before we pay income tax will be increased again – perhaps to £11,000 from the £10,600 it is set to become in April. I also suspect this will be given to all as a vote winner and not just reserved for those below the higher rate tax threshold levels. The Chancellor did limit increases in the early part of the Parliament this way, but he gave the increase to all last year, and I expect he’ll do the same again with an election pending – why upset anyone if you don’t have to?
This may go against the current culture of bashing the better-off for not paying their fair share of tax, although organisations like the IFS are always quick to point out that the richer income tax payers in the UK already pay the bulk of the sum this tax raises for us (and which itself makes up a quarter of all the tax revenue the Government will get this year). For example, around 25% of all income tax is paid by the top 0.5% of taxpayers, and almost 50% is paid by the top 3%. However, some may argue this is still not high enough.
Where else might we see changes? I suspect there is more to come on the new pension rules to further open up people’s options for managing their pension sums. This will continue the Government’s trend of putting power into the hands of the beneficial owners from a system that only a few years ago meant people had almost no control over how their pension pot was used.
There may also be more on welfare cuts, given they appear to be popular and fit the Tory philosophy, even if they often are poorly targeted, hurting those who need and deserve them as well as those who don’t.
I also strongly suspect we will hear more on corporate tax refinements, further aiming to prevent the apparent abuses of large corporates that are in the public eye at present (albeit almost always perfectly legal and complying with laws previous Parliaments have knowingly agreed to). The new ‘diverted profits tax’ announced in the Autumn statement will be given more teeth, I suspect.
Professor Andy Lymer, Professor of Accounting and Taxation
John Fender asks whether George Osborne will continue to be a master of surprise
Political considerations will of course be dominant in framing George Osborne’s Budget on Wednesday 18 March, just 50 days before the General Election. But the best budget from the Conservative point of view will not be a blatantly electioneering budget with large giveaways. Rather, it will try to create the following impression: ‘While things have been tough in the past few years, and we’ve had to make some hard choices, we are now seeing improvements. There’s still some way to go, so it’s important that we stick with current policies and not risk everything by changing our leaders in a few weeks’ time.’
It seems the Chancellor may have some good news to offer in the form of relaxing his announced austerity programme somewhat. It will be interesting to see whether he will change his forecasts for the deficit over the next few years and whether he revises his plans for government spending, including spending on welfare and on the infrastructure.
George Osborne is a master at pulling surprises. These have included appointing Mark Carney as Governor of the Bank of England and the stamp duty reform announced in the last Autumn Statement. Of course, surprises cannot be predicted, but we can be confident there will be some.
It will be a considerable surprise if there are no significant measures to help the North Sea oil industry, which is suffering because of the recent dramatic and unexpected fall in the world oil price. It might be asked what electoral benefits there would be from helping the oil industry, as the consequences would largely be felt in Scotland, where the Tories have minimal representation. But another consequence of such measures would be a significant boost to the share prices of energy companies, and this may not be a negligible consideration in the Chancellor’s calculus. If the FTSE 100 index were to rise above 7000 in the run-up to the election, then this might be interpreted as market endorsement of Tory policies.
We might also see measures to help small businesses, and changes in pension tax relief.
My expectation, then, is for a budget that contains surprises, and results in a rise in both the stock market and in the Conservatives’ poll ratings.
Professor John Fender, Professor of Macroeconomics
Isabelle Szmigin predicts which sections of the electorate the Chancellor will target
A budget that comes just two months before a general election may be considered by some as a pointless exercise and by others a golden marketing opportunity. By the latter I mean a budget that targets segments of the population that the current Government wants to send a message to, positioning their promises (in effect their products) in a way that gets buy-in from the voters.
David Cameron has made much during his years in government of being on the side of hardworking people. One of the things that this budget needs to do is show that it is fair to all hardworking people and not just rich hardworking people, starting with the same tax rules applying to everyone. HMRC letters are pretty tough when directed at a £50 underpayment from a working mother; they need to be equally hard-hitting when chasing £5 million from a tycoon.
And speaking of tax avoidance and evasion, how long does the Chancellor propose to avoid or evade the matter of VAT being so high, hiked to 20% as an emergency measure from January 2011? Are we still in the same emergency situation? If the Chancellor really wants to win over the floating voter, then reducing VAT would be a benefit to everyone in the country of voting age and above.
Traditionally, the people who will come out to vote are the more mature, and therefore the budget needs to ensure they are not disadvantaged – especially those whose interest income from savings has been diverted to help hard-pressed mortgage payers for the past seven years of austerity economics, hence being kept away from their own personal consumption.
People who are coming up to retirement age will now have the opportunity to benefit from taking cash from their pensions to boost their disposable income, which would be a bonanza for the consumer market, but there has been a lot of concern recently that this might become a nightmare for some. The Chancellor must ensure that mechanisms are put in place both to safeguard pension holders from making inappropriate choices and to stop the unscrupulous from latching on to this potential goldmine of other people’s money. As it is, the Chancellor himself already has staked his claim over it.
Professor Isabelle Szmigin, Professor of Marketing