Budget 2012: Juggling Tax Thresholds is Not Enough
Thursday 22nd March 2012: Sheila Lawlor, Politeia’s Director, argues that the Chancellor’s budget should focus on the economics of tomorrow, not the politics of today.
The 2012 Budget seemed to have something for everyone. For low earners there are tax cuts, as the threshold for paying income tax rises to £9,200; for business there are cuts in corporation tax, down to 24 per cent with a promise of more; and for families fearing the loss of child benefit, a reprieve, so that a family with one income up to 50K will be eligible for the benefit (and those earning from 50 to 60K for part of it). And for all who recognize that the public finances and public spending must be brought under control, there is the comfort of a ‘fiscally neutral’ budget.
But the Chancellor, in seeing off some of the demands of today, may be stacking up difficulties for the future. For instance, the way in which ‘neutrality’ has been achieved will bring its own problems as the threshold for paying tax has gone up as well as down.
Pensioners on modest incomes will see personal allowances cut. Higher rate tax at 40 per cent will kick in at earnings of £41,450 and over (not £42,750 as now). These tax rises augur ill for a country which is now racing against time to make the changes needed for the UK economy to survive and succeed against stiff global competition.
If the UK is to compete and to sell its goods to the emerging markets of Brazil and Asia on which the Chancellor has set his sights, it will need to change. People will have to work harder (not just longer) and earn more in a labour market which is flexible and open, not stifled by anachronistic regulation. They are not going to do that under current penal policies. Moreover, business will have to grow, not driven elsewhere by the current tax and employment costs levied on business and employers. If Germany can cut corporation tax from 25 per cent to 15 per cent, so can we!
So instead of penalizing people who work harder by juggling the thresholds at which income tax is applied, more ambitious plans are needed, short and long term, for cutting levels of public spending. For the real problem for any Budget is not the politics of today, but the economics of tomorrow.
For change, survival and growth, spending ratios must be brought down, initially to pre-crisis levels and in the longer term to around 35 per cent of GDP. To do that – and provide people with the social goods western countries want – greater changes are needed.
Levels of public spending proportionate to GDP must continue to fall. Efficiency savings are often mentioned here. They should not fall on frontline services – as is already the case, with the most able doctors and specialist research hospitals being squeezed out by Whitehall’s henchmen. Rather the squeeze should be on those very officials whose number and kind exploded in the decade to 2010. However, to sustain affordable public spending at levels which encourage growth and protect the services like healthcare that people want, markets are needed with equal opportunities for market participants to provide essential public goods and services. That view is increasingly taken by economists the world over (see for example Ludger Schuknecht’s Booms, Busts and Fiscal Policy: Public Finance for the Future (Politeia 2009). If countries are to compete, flourish and grow, UK Budgets will, over time have to aim for spending levels of around 35 per cent of GDP.
*Dr Sheila Lawlor, Director of Politeia
This blog was also published by Reuters on 22 March and can be viewed here.