My immediate instinct on hearing the budget was that it was a clever tax raising exercise.
A review of the Budget publications proves I am right. See pages 208 to 210 here. The policy decisions are almost neutral in revenue terms. Tackling tax avoidance raises £1 billion a year, air passenger duty rates a little more a year and in economic terms that's it.
The immediate reaction at the BBC was that the tax cuts were a big 'give away'. That was always going to be wrong. Gordon Brown announced his budget was neutral right at the start.
So what has happened?
Well, the 10p tax band has gone, but cutting the basic rate of tax has given the increase in tax right back.
Pensioners will get a better deal in terms of big increases in allowances. Tax credits improve a bit. This is paid for by increases in the national insurance take on those earnings between about £33,000 and £43,000 a year. What isn't paid for that way is paid for by hitting tax avoidance.
The cut in the main corporation tax rate is paid for, as I predicted, almost exactly by reduced relief on capital spending, which does however bring the relief more in line with economic reality (which you can be sure business will not like). And the increase in the small company rate of corporation tax pays for the cut in their effective rate by being more generous with them on capital spending.
The redistribution effect? Forget it. There isn't one, although I suspect those on £20,000 or so might lose - but that's instinct only at the moment.
So what's it all about? The obvious answer is window dressing. This is not the 'big budget' we were promised. It is a politically clever one though. It gives the CBI the cut in headline taxes it wanted to attract business to the UK. But it did it at no real cost to the Treasury. Manufacturing may lose slightly, and IT intensive companies quite a lot (so bad luck banks) on the capital allowances, but that's it.
For the small business lobby this is a good budget - they have a virtual flat tax. Most small business do not spend £50,000 a year on capital equipment and for them the change is all good news. the increase in rates is inconsequential in comparison.
For the professions - there's a clear signal that tax avoidance will still be sat on (and "hear, hear" I say).
For pensioners it's all good news.
For the middle classes though - the swing voter, this will make little difference. That's the gamble. Brown wants the perception of tax cuts to sell his story, not the absence of their reality to be understood. As I've noted, it worked for the Tories in 87. It may do so for Brown. It's certainly going to give Cameron a hard time.
But, let's be clear. the big issues concerning justice were not tackled. And that's massively disappointing.
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[…] I suspect Mike is once again banging the Big Four non-choice quality drum. On this occasion, he’s up against something even he can’t influence – a government prepared to plough its own furrow. Which is more than can be said of outgoing Chancellor Gordon Brown’s swan song. […]
I would tend to agree with your analysis re the fiscal effect of this. But politically he has surely given the Tories the rope with which to hang him? They always say that Joe Public does not understand the detail, but the key voters who have kept Blair in power will understand the impact on their pockets. Perhaps he has done enough to secure the top job, but he has given himself a poisoned chalice.
Alastair
You may be right…..
Richard
Dennis Howlett makes an interesting point that Brown has not simplifed the tax system. (Follow the link above to his place).
Dennis is pretty much right. What was annoying though was seeing Brown pretending he was.
That said – small business will have (I hope) seriously imporved (and relaxed) rules on capital spending and I welcome that.
Richard
As he said, a tax neutral budget, or was it, like all budgets from Brown this one will take a bit of reviewing to see what he didn’t say which is what always hurts.
We see the corporation tax rate for larger concerns reducing while that of the small business is going up, not a very small business friendly budget on the face of it.
If you are a small business that spends regularly on capital equipment you may very well be pleased, as for the rest you, you will now have to pay 1% more from 1 April 2007 and more increases on the way until you pay 3% more, not very good news.
The reduction of the 22% band but coupled with the removal of the 10% band will certainly affect those on low incomes, i.e. £7,000pa part-timers; they will pay more than they have before.
Personally, I have not yet gone through the budget in any detail, but my initial reaction is it has nothing particularly good except for bigger business with a reduction in their rate of corporation tax, but again, not by as much as developing countries like China who are looking to unify their tax rates at 25%.
So Brown has reduced tax rates for big business but not by much, he has increased the tax burden on the smaller business, but again not by much, let’s face it he could have slapped national insurance on dividends now that would have hurt, and if he ever gets into power, god forbid, maybe he will do just that, I quote: “The government will continue to monitor the level and extent to which labour income is extracted by dividends”.
Brown has increased the tax burden in Britain over the last 10 years and with the help of Blair they have wasted record amounts of the tax take, which is a disgrace, but as far as any Brown budget goes, it could have been one hell of a lot worse, and may be a future Labour budget will be?
[…] For UK readers who are too busy to weed through the newspapers this morning, and want a quick, sensible, summary snapshot of Gordon Brown’s last (11th) budget as chancellor, they should go and read Richard Murphy. He thinks it’s good for small business, little different for the middle classes, and a massive disappointment that this wasn’t the “big” budget we were promised. High on presentation and low on substance. Technorati tags: Richard+Murphy, BBC, Gordon+Brown, budget+2007, tax [link] […]
I agree with Jason – this budget has, amongst other things, squeezed small companies, by reducing the tax % for large companies and increasing it for small ones.
And I think it’s mainly the small service companies that will feel the pinch, because they don’t have many fixed assets beyond, possibly, a computer and printer, so the increased capital allowances will not be useful to them.
And, if they don’t plan to grow, they won’t ever have the advantage of the reduction in the large companies’ rate.
BTW guess who has just set up a one-woman service company called Ask M Ltd 🙂
M
[…] The Budget – now I’ve seen the figures […]
[…] did. I said, almost immediately after the budget was published and before I’d had a chance to analyse it […]