George Osborne has been rigorously defending himself from accusations that the poorest are the hardest hit by Wednesday’s Autumn Statement, insisting that the squeeze is fair and that there are measures for growth to improve the economy.
We’ve detailed the main points of the statement here, but let’s reaffirm them below.
- UK economy predicted to contract this year. Growth forecasts down for forthcoming years.
- Supported by OBR figures, Chancellor claims that borrowing and the deficit are down.
- Welfare cuts, adjustments to the pension allowance, government efficiency, and a tax avoidance crackdown are all required to cut the deficit.
- Rise in personal tax allowance to £9,940.
- Working-age benefits capped for first time, at just 1%.
- Annual tax-free pension contribution lowered from £50K to £40K.
- 3p rise in petrol scrapped.
- Business taxes to be lowered, while investment relief rises tenfold to support businesses trying to grow.
So, what did the chancellor get right? What did the chancellor get wrong? A few thoughts below.
The Institute of Fiscal Studies believes that the “permanence” of low growth has been the biggest structural problem for the UK’s public finances. Low growth leads to low tax receipts, a higher welfare bill, and lower investment.
Though we’re still looking grim compared to the G7, the ability of the UK economy to adjust and keep unemployment low has surely prevented productivity and performance from falling far lower than it could have done. But the argument remains that, outside of London, much of the country is still effectively in recession.
So, the chancellor’s focus on growth was always going to be important. This was led by a cut in corporation tax to 21% from 2014, which will make the UK highly competitive, and a huge additional tax relief for growing businesses as the capital investment allowance rises from £25,000 to £250,000. The chancellor announced more for the Regional Growth Fund, and confirmed that investment in the rail network and ultra-fast broadband would continue.
Stephen Robertson, Director General of the British Retail Consortium, said that the Statement included “bold moves” that would inspire confidence in households and businesses to spend and invest. However, he said that more needed to be done, and that the speed of delivery was vital.
There were welcome measures, on fuel duty, infrastructure investment and business and personal taxes but some of these are not due until 2014… Much more needs to be done to support the retail sector in its contribution to overall growth. It’s essential the Government continues its good work on keeping the cost of borrowing low.
Stephen Robertson, Director General, British Retail Consortium
All working age benefits are to rise by just 1% a year for the next three years, which will see claimants losing out in real terms. The chancellor argues that a benefits squeeze is needed to reduce the deficit, and his argument that benefits have risen faster than public sector wages in recent years has plenty of support from people aggrieved that their taxes have gone towards higher benefits.
Osborne is adamant that he wants to help people who want to work hard, but he fails to recognize the extent to which hard-working people still rely on state support and will be penalised by the measures. While a rise in the income tax personal allowance is welcome, this is savaged in some cases by the erosion of supplementary income. The flawed child benefit reduction plan (mentioned here) aptly demonstrates poorly-thought-through welfare policy.
It’s easy to see why analysts come to the conclusion that there’s little in the Statement for families. With food, heating, and rental costs all soaring, the government will need to assess the viability of Universal Credit before any further cuts are made.
Cutting another £3.7 billion will still hit working families and families on the edge… The government can’t keep hitting the same people over and over again. Below inflation benefit increases will not just hit people who are out of work. It will also hurt working families in low paid jobs who have already been hit by wage freezes and cuts in working hours… Many thousands of people already battered by the impact of the recession are on a financial cliff edge.
Gillian Guy, Chief Executive, Citizens’ Advice
Hugely controversial, this, because political ideology comes into play, as well as a complicated play-off of different variables. Labour accused the chancellor of a tax cut to the rich by sticking to his pledge to cut the top rate of tax to 45p from April 2013.
Armed with figures from HMRC, George Osborne argued that the higher rate had damaged British competitiveness, increased tax avoidance, and raised only a small proportion of what was expected. Following the implementation of the 50% income tax rate, the number of taxpayers declaring £1 million fell by 60% in 2010-2011, from around 16,000 to just 6,000. As the Wall Street Journal rather shrewdly notes: “a funny thing often happens on the way to soaking the rich: they don’t often stick around for the bath”.
HMRC believes that reducing the rate back to 45% will only cost in the region of £100 million, though this assumes (somewhat fancifully) that those who avoided the higher rate will pay up at 45p. But there is little doubt that tax avoidance has forced its way up the political spectrum.
A deal struck with Switzerland will return £5 billion from offshore bank accounts over six years, and several loopholes have been closed with immediate effect. HMRC is not only escaping Whitehall cuts, but will also receive more funds for tackling avoidance. Its ability to do this at scale remains to be seen, but a tax-rate closer to 40% could ease avoiders back towards legitimate tax arrangements.
There is little consensus on tax optimisation. Some believe that countries with better and more competitive tax policies grow faster and create more jobs. Some believe – in the case of the US – that the impact of higher taxes will be “negligible”.
The Laffer curve, though oversimplified, shows that the connection between tax rate and tax revenue will always be less than linear and that, now more than ever, it is complicated by avoidance and a vast array of clever accounting methods. A recent study on the curve from the US National Bureau of Economic Research concluded that “there is considerably less scope for additional financing of government revenue in Europe from raising labour taxes”. Interesting.
In the end, perhaps it all boils down to a personal opinion of whether higher tax for higher earnings is seen to be fair or punitive. On paper, the chancellor’s stance appears to be: I’ll cut taxes, but I expect them to be paid. I don’t doubt the slipperiness here, but on those specific grounds, it’s a thumbs-up.
Savings / ISAs
Disappointing. Savers have endured a very tough year. Quantitative easing has shredded the value of pensions and the Funding for Lending scheme has shredded the returns on savings. In light of this, the raising of the personal limit on ISAs by £240 (or £120 in cash) appeared rather less generous than the chancellor seemed to think it was.
The perpetual focus on stocks and shares ISAs, which received more attention again this time around, is out of touch with what most savers actually want.
To Graham Beale, Chief Executive of Nationwide, increasing the cash ISA limit would not only improve the property market by allowing people to save efficiently for deposits, but also boost confidence while savings accounts plummet below inflation.
Increasing the cash ISA limit would have given a much needed boost to savers and the many first time buyers who use ISAs to save for their deposits… We know from our members that this would provide consumers with a simpler and fairer way to maximize their tax-free savings.
Graham Beale, Chief Executive, Nationwide
Amid the recent clamour regarding tax avoidance, it is important that ISAs are highlighted as a positive savings vehicle. And with monetary growth schemes having such a catastrophic effect on savings accounts, it is gravely disappointing that an opportunity to grant some serious tax relief has been spurned.
 ‘Britain’s Missing Millionaires: Income tax rates rise but revenues fall’, Wall Street Journal, 3 December 2012.
 Lawrence C. Smith, Murphy Smith, and William C. Gruben, ‘A Multinational Analysis of Tax Rates and Economic Activity’, Journal of International Business Research (2010); Joe Klein, ‘Taxes: Rattner Refutes Laffer’, Time, Swampland, 26 November 2012.
 Mathias Trabandt and Harald Uhlig, ‘How far are we from the Slippery Slope? The Laffer Curve Revisited’, National Bureau of Economic Research Working Paper Series, 2009 (p. 17).