Budget of small things
George Osborne deserves a lukewarm round of applause. Britain’s chancellor, pinned down by a still-large deficit and rating agencies threatening the UK’s triple-A credit rating, tried to work some tricks into his budget. Cutting taxes for the very rich and less well-off, and further lowering corporation tax, is mildly positive for optimism, growth and recovery. But the need to maintain fiscal sobriety means that what Osborne gives with one hand, he has to take with the other.
Osborne claimed the budget rewards work, backs business and reforms the tax system. It does, but in meagre measures. In fiscal terms, the main change is his decision to lift the threshold at which personal income tax kicks in. That helps the low-paid, and encourages them to work rather than take benefit.
Cutting corporation tax by a further percentage point, to 24 percent, will be welcomed by business. Like Ireland, the UK may find that low headline rates of corporation tax help to attract foreign investment and stimulate diversification of the economy, growth and employment.
In political terms, however, Osborne’s biggest decision was to lower the top rate of income tax – paid by those earning more than 150,000 pounds – to 45 percent from 50 percent next year. The tax, introduced by the previous Labour administration, seems to have generated minimal revenue: lowering it is expected to cost the exchequer just 100 million pounds a year. That’s less than a fifth of what Osborne expects to raise by increasing stamp duty on expensive house purchases, and by closing tax loopholes exploited by the wealthy.
Income taxes are a disincentive to work and some high earners will have worked less, evaded more or decamped. Still, the government will be vulnerable to claims that it is cutting taxes for the rich while punishing the less well-off – most notably pensioners, whose tax allowances have been frozen.
Unfortunately the UK’s public finances give Osborne little scope for generosity. For all the talk of austerity and spending cuts, the government will still pump 6 percent of GDP into a slow-growing economy in 2012/13. Whatever Osborne’s critics say, there is little more he could have done for growth without risking fiscal sobriety – and the government’s entire plan for recovery.