Wednesday, 21 March 2012

Osbourne puts politics before finances - and not even very successfully

So key measure in the budget is to drop the tax rate for those earning over £150,000 from 50p to 45p starting from April 2013.

Now I happen to believe that Osbourne has massaged his figures and making a real mistake financially by dropping it at all, and it's not clear what actual benefit it will bring.  Even the OBR says it will not have any impact on economic growth, which is surely the point and gives the lie to the idea that it is somehow damaging the economy.

But there is something beyond just ideology here, there's incompetence.

By announcing now that he plans to drop it in a year's time is incredibly bad from a purely financial point of view.

Most of us pay income tax through PAYE or if you are self employed through self assessment at the end of the year.   So there's not much you can do to adjust how much income you earn in a year short of actually changing the amount of work you do.

A lot of 50p rate taxpayers on the other hand actually receive much of their income in the form of bonuses or dividends from limited companies. And the tax on these is paid when the money transfers from the business to you, which is normally fair enough - after all you can't spend it until it comes to you so why be taxed on it early.

However by giving a year's notice on the change this gives a perfect chance for some 'tax planning'.  If I was the owner-director of a limited company and was planning on a dividend payout of £250,000 next year and trying to reduce my tax bill I would simply delay £100,000 of my dividend to April 2013.  This would immediately save me tax of £5,000.  If the change was immediate that simply wouldn't happen - so why not wait a year and then announce the change then?  So much for trying to clamp down on tax avoidance.

UPDATE According to Channel 4's Faisil Islam Osbourne's own Office of budget Responsibility are predicting £6.25 BILLION will be shifted from one year to another.  That means that even the optimists who staff the OBR think  that by announcing this a year early Osbourne has lost the exchequer £312.5 million.  That's a lot of paid work placements for unemployed young people!

It's not like the Treasury didn't spot this issue, when an issue is on Robert Peston's blog (and elsewhere) in advance of budget day you can be sure that the treasury are completely aware of the likely behaviour.

The only reason for this can be politics.  This will artificially depress the amount the 50p rate raises next year - a self justifying prophesy.  It will also artificially push tax receipts into January 2014.  Which is convenient for a pre-election budget.

So a political move.  But not even a very good one, as dropping the higher rate of tax overall is consistently unpopular in opinion polls and gives total credence to the claims that this is a 'millionaires budget'.

There are lots of other really unfair measures in the budget - from the 'granny tax' hitting an already hit age group, those coming up to retirement; a failure to sort out the mess that is the child benefit proposals and cuts in tax credits for low earners.  What was really conspicuous was the absences though:  absence of a plan for restarting growth, for getting young people into work or anything to reduce the cost of living.

So a budget built on ideology and incompetence.

What's sad is no-one seems surprised.