Good tax cuts drowned out by a series of silly errors

City AM editor Allister Heath says there was one over-riding failure in the Budget: a refusal to accelerate spending cuts…

Somebody like me – a believer in lower taxes and less government intervention – ought to love this Budget. I certainly like the fact that the top rate of tax will fall by five percentage points (even if this will only happen in 13 months’ time), and that corporation tax is being cut to 24% next month. This will boost incentives and competitiveness. But despite that – and perhaps because so much of the Budget had been leaked – I was left feeling underwhelmed. But before I explain why I’m uneasy about the overall tone of the Budget, let me tell you what George Osborne got right.

The UK is partially reopening for business, though the process is far from complete and is still going into reverse for the financial services industry, including insurers. Proposed enhancements announced yesterday to enterprise management incentive (EMI) schemes could be great if they materialise; and a boost to the enterprise investment schemes (EIS) and venture capital trusts (VCTs) will also help. The rise in the personal allowance to £8,105 in April and to £9,205 in April 2013 will improve the incentives of low earners to work and is therefore welcome. After being raided last year, helping to trigger a collapse in output, oil and gas companies were given a boost yesterday. New field allowances will undo some of Osborne’s previous blunder.

There are other positive reforms. Public spending as a share of GDP is falling from 48% in 2009-10 to 39% by 2016-17 on the Treasury’s measure. A net 730,000 public sector jobs will go between the start of 2011 and the start of 2017. While painful, this will help reverse Gordon Brown’s catastrophic increase in the size and tentacles of the state. There is even a chance that the new general anti abuse rule (GAAR) for tax avoidance may be implemented sensibly. The government rightly wants to prevent “artificial and abusive tax avoidance” but seems to realise that this must not create uncertainty for normal transactions.

So much for the good news. The rest of the Budget, its lack of a proper philosophical underpinning and the fact that Osborne felt the need to bash “the rich” to justify cutting the top rate of tax was disappointing. At times, Osborne sounded almost like Brown; had their accents not been so different, they could have been the same person. Massive tax hikes on pensioners and company cars were buried in the Red Book and not mentioned properly in the speech. Silly Sunday trading laws will be reinstated after the Olympics; there is still nothing concrete on airport expansion, or on the planning shake-up. There has been no break with Brownonomics when it comes to tinkering and fiddling: Osborne believes in picking winners: this time, aerodynamics and video game makers are flavour of the month. There will be a new, simple tax calculation for businesses but only for those with a turnover up to £77,000.

A real supply-side Budget would have slashed marginal rates for the majority of taxpayers to boost incentives to work, save and invest – and cut spending faster. Yet the rise in the personal allowance cuts the marginal rates of no more than 7% of taxpayers. Another 300,000 earners will be drawn into the 40% band, increasing their marginal tax rates. The cut in the top rate affects only 300,000 people. Plans to withdraw child benefit from higher-rate taxpayers have been watered down – they will be cut progressively for families with one parent on £50,000. They will be completely withdrawn from those on £60,000. But this will mean crippling marginal tax rates for parents earning between £50-60,000: on top of the 42% current rate (including employee national insurance), the Social Market Foundation calculates that an extra rate of 10.6% will be payable for parents with one child, 17.5% for those with two and 24.5% for those with three. This is ridiculous – and families with two adults in work earning £50,000 each (a combined £100,000) will still get the benefit but single earner families on £60,000 won’t. Middle class welfare is not a good idea – but the way forward should have been to restrict the benefit as part of a massive package of tax and spending cuts. Osborne has blundered badly. He also retains crippling marginal tax rates between £100,000 and £118,000, when taxpayers lose their personal allowance.

The rise in the personal allowance is partly being paid for by freezing age-related allowances and hiking VAT (including on hot sandwiches). It makes sense that age-related allowances are eliminated over time but this is a brutal and ill-thought out way of doing it. Pensioners will end up paying much more tax; this raid on grannies could derail the entire Budget and damage Boris Johnson’s reelection chances.

Crucially, the reduction in receipts from the corporation tax cut is exceeded by increases in other business revenues, stemming in part from yet another hike in the bank levy – so much for the claim that Osborne is now at peace with the City – and a massive increase in the tax on company cars. Changes to North Sea taxation and controlled foreign company rules will also boost revenue, but that is partly because of increased activity and therefore a good thing.

The cap on unlimited tax reliefs is a dramatic change to UK tax law – but it is hard to see its real (as opposed to political) purpose. Reliefs exist for a reason. Yet now, for anybody seeking to claim more than £50,000 in reliefs, a cap will be set at 25% of income (or £50,000, whichever is greater). The main losers will be charities.

There has equally been no clean break with Brown’s legacy when it comes to income tax. Why was the top rate of tax just cut to 45p, and not to 40p, where it had been since 1988? The economic justification for not doing so doesn’t make sense – it is based on an estimate by the Treasury of how people respond to taxes that appears to have been chosen merely to justify this new rate. At 45p, Britain’s marginal income rate is well above the G7 and EU average – and the real rate is 47p, plus 13.8% employers’ national insurance. And why wait a year? We needed shock and awe to jolt the economy back into action; instead, the UK is now stuck with a still high tax rate because of some grubby compromise.

I’m all for abolishing daft loopholes. It makes no sense that people can avoid stamp duty by using a company to buy homes. But those who legally and openly did so in the past are now going to be penalised retrospectively with an annual levy on properties held in companies. This is a very bad principle and a mini-mansion tax via the back door. The Treasury argues that 5,000 homes are kept in such companies; many may now be put up for sale, disrupting the market. Meanwhile, the new top 7% stamp duty rate is extortionate and a tax on moving. For the sake of trying to hide the fact that he was helping high earners by cutting their income tax – and to allow him to produce a dodgy spreadsheet claiming that high earners will now pay more tax on average, even though 99% won’t – Osborne chose to wage class war on a handful of wealthy folk. There was one over-riding failure in the Budget: a refusal to accelerate spending cuts. That forced the chancellor into all sorts of silly tax hikes – especially on pensioners – which he will be paying for politically for years to come.

Read the City AM article here.

City AM’s deputy editor David Hellier now writes a monthly City View blog for MediaTel’s Newsline. Look out for his next article on Tuesday.