A Scrub Up On The Budget

Last Tuesday saw Young Fabians come together ahead of the forthcoming Anatomy to talk about the important issues of the Budget over casual drinks in the City. This ‘Scrub Up’ discussion developed towards two important questions; two axis of measurement on how sound  tothe policy.

The first axis was centred around the question of whether the Budget was fair, or if it hit certain groups in a disproportional manner, and whether that remains true when looking at the overall programme of cuts by this government. Are elements such as the Granny or Pasty Tax really unfair, or should pensioners take some of the burden that has been so far felt by today’s youth? Will corporation tax change actually result in increased investment, or is Britain the logical choice to invest in anyway, with uncertainty in the Eurozone? There is the prospect of a Tobin tax in Europe, and if Francois Hollande is elected in France, an income tax top rate of 75%.

The second axis picked up on comments by Lord Layard at the recent Young Fabians event on wellbeing politics- the differences between short-run and long-run growth. The question whether changes in corporation tax infrastructure is the best course of action for Britain to take in the short term, and whether this budget will actually help society in the next year or two, is a pressing one. As is the question of whether low growth will leave an entire generation behind.

We spoke more about whether regional investment such as the northern transportation and ultra-fast broadband hubs were enough to promote growth, or whether it was London that benefited most from the Budget. Are the investments in the regions merely token supplements in relation to the massive loss of industry sustained there since 2008?

Will pressures on housing from job growth in London see an increase in demand spiral costs even higher? Is the change on property stamp duty aggressive enough? I suggested that an alternative was to target residential property above £250,000k owned by corporate entities with 15% stamp duty- with exceptions for social enterprises- to discourage the monopoly of large for-profit property companies. What would a drop in house prices mean politically, with so many households in Britain holding the majority of their assets in their home?

With the many lines of enquiry that can be taken on the Budget, the upcoming Anatomy session will look in detail at only a few. For those who missed out on applying to join the group, the results of our investigation will be published on the blog for your scrutiny in due course.

Alex Adranghi is the Chair of the Young Fabians Future of Finance Network

The Anatomy will run at Parliament

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To find out more about the budget, you can read the official executive summery and Deloitte’s online analysis. 

The GAAR – Hanging in the balance

A one-to-watch outcome of the Budget was the coalition’s announcement to start a consultation with a view to introduce a General Anti-Avoidance Rule. Osborne has not yet made his intentions clear as to whether he will follow the advice of QC Graham Aaronson (commissioned by the Treasury to report on the best GAAR structure) and introduce a simple anti-abuse measure. Two options are open to him. The first sees the new rule become a heavy-handed instrument, as recommended by Lib Dem Lord Oakshott, giving much more power to the government, and causing confusion within the tax and business community around whether standard transactions equate to avoidance. The second option conforms more to Aaronson’s advice, with the rule becoming a simple anti-abuse measure without much bite.

GAARs are often seen as controversial by tax professionals as the former version can include standard commercial transactions not intended to evade or avoid. Such transactions can affect pension schemes, or capital allowances. This outcome would result not only in unfair penalties and over-cautious tax planning, but affect the overall relationship between HMRC and taxpayers, and increase the UK’s competitive disadvantage. Though the chances of HMRC using its powers within a general rule are slim, the balance would still shift in its favour, and taxpayers and businesses would depend more on the HMRC’s discretion. This kind of uncertainty is not conducive to growth in a stagnant economy, with current perceptions of the UK tax system already branding it confusing, complex and cumbersome.

Aaronson had a hand in much of the construction of the General Anti-Avoidance rule, by setting up an independent advisory panel (which could be heavily biased towards the tax profession), narrowing down its scope to particular transactions, and laying the burden of proof at HMRC’s door. Aaronson himself admitted that further along the line, the intentions behind the rule could ultimately be watered down by these safeguards. However, Osborne has hinted that he will err on the side of Aronson’s recommendations. With tax avoidance in the headlines on a daily basis, the government would benefit from a public perception that is tough on avoidance.

Given the success of the disclosure rules, some have voiced that the GAAR could be a needless measure adding extra complexity, introduced to pacify the Lib Dems. The result of the consultation needs to be a proposal that avoids the potential pitfalls of a heavy-handed, red-tape heavy regime, making it easy to invest and build business in the UK, whilst at the same time generating revenue from deliberate contrived schemes to avoid paying what is owed.

Legislation on a GAAR is due to be included in the Finance Bill 2013.

Melissa Higgs is a member of the Young Fabians Future of Finance Steering Group

Budget 2012: A local wage for local people

George Osborne has delivered his third budget in the two ways that Mike Campbell went broke in Ernest Hemingway’s The Sun Also Rises: ‘gradually and then suddenly’. It was leaked studiously over the course of the preceding days, ensuring that much of Osborne’s speech was not much of a surprise, but unfortunately for the Tories they proved less adept at controlling the news cycle after the event – hence, presumably, the bizarrely timed announcement about minimum pricing for alcohol.

The first I heard of the budget’s substance (except for the perennial chatter about the 50p tax rate) concerned the mooted end to national parity of pay in the public sector; this might be done by freezing pay in certain areas – i.e. reducing pay in real terms – beyond the end of the general freeze already in place. The theory seems to be that this will make local firms more competitive in the jobs market and stimulate a private sector-led resurgence in the fortunes of poorer parts of the country.

You’d have to have a very short memory indeed not to recall a time when there was a large number of cheap and newly-work-hungry people to be hired in, say, the North East, and yet no ensuing economic miracle. It just doesn’t work like that. There’s every reason to believe that, without state intervention, rich cities will always suck up and keep the great majority of a society’s educated youth, which perpetuates regional disparities. Nobody who grows up in London moves to Great Yarmouth to work for a hedge fund, but you can bet it (occasionally) happens in reverse.

How should the Government address this? Well, it’s probably increasingly difficult in a services-based economy with a mobile population. In the past, an area with low pay would have been an attractive place to build a factory; then it would have been an attractive place to put a call centre; but with many of those jobs going to the developing world, the state needs to actively stimulate regional economies. One obvious sector to pursue would be green energy – a high-tech growth market that has the added bonus of being ethical – but the Tory drive to cut the deficit means both that new investment is in short supply and that our world-class existing intellectual infrastructure (i.e. the university network) is having the rug pulled out from under it.

But one thing the state can do is pay people a decent wage. Much is made of the disparity between public and private sector pay, as though public servants gleefully break into vaults at GlaxoSmithKline and raid the piggy banks, but the truth is it’s not a fair comparison. Public sector workers are more highly educated than private sector workers, and their equivalents in the private sector often earn orders of magnitude more. But even that is missing the point – if public servants earn more than private sector workers, it’s not because the former earn too much but rather because the latter earn too little. The only way to combat that sustainably is to stimulate the economy, and in poor areas that often means – you guessed it – state investment.

But even if I’m right, it might not change Osborne’s mind. Perhaps the real motive for introducing regional pay is to break national unions and replace them with fractured, fractious shouting-houses. It wouldn’t surprise me.

David Jones is a member of the Young Fabians Future of Finance Steering Group

Budget 2012: The ‘Granny Tax’

George Osborne delivered the two Eds the best kind of political surprise in this year’s budget by announcing a squeeze on pensioners.

However, the so called ‘Granny tax’ is much more a political label than a raid on pensions. Current income tax allowance for those under the age of 65 will rise by £1,100 to £9,205. Those older than this threshold but under 74 currently receive £10,500, and those above 74 receive £10,660. From the 2013 tax year these allowances will be fixed, both in cash terms and eligibility. As such, those who belong to either of the two higher age cohorts will not receive additional allowance. The purpose of this is to keep these higher rates static in cash terms until the working age tax-free allowance catches up. From that point, there will be a single band of tax free allowance regardless of age. Is this really bad policy or just bad politically?

The political dialogue has jumped onto HMRC’s own assessment which reveals that 4.41 million people will be worse off in real terms come 2013′s tax year to the tune of £83. This represents 40% of all pensioners. Of the other 60%, 50% are not taxed, while the top 10% do not receive the additional allowance.

After a reverse calculation, the average income of this subgroup (the 40%) stands at 57% more than an individual receiving the maximum basic pension with pension credit. The Budget is not hitting the poorest pensioners by any means.

I don’t see why we should complicate the system with multiple tax allowances based on age. The simplification of the tax regime is a good thing, and that is only ever going to come with the closing of the gap between the different threshold limits. Any benefits associated with age should just be added to income. Simple. This measure was always going to be open to political attack regardless of which government proposed it – as closing the gap would mean that pensioners would be doing relatively worse off than the rest of the population.

The government could not justify a progressive bridging aid to make up the ‘shortfall’ for existing pensioners and those near-retirement without paying out to the bottom 50% who are not affected by this ‘cut.’ If they did, the Coalition would have been attacked for providing a tax break to Middle-England pensioners, which would have cost the Treasury around £1 billion a year.

What has been overlooked in this discussion is that HMRC’s calculations are compiled using the Retail Price Index, mainly because personal allowances are required to increase as a percentage of this index by law. The current Retail Price Index is 3.7%.

Going back to last year, public pensions were switched from being linked to the Retail Price Index to the Consumer Price Index. The government explained the reason for the change by arguing that the CPI was a better reflection of the basket of products that pensioners’ spend their money on. However, the major difference between the indices is that the latter does not factor in housing costs such as rent and mortgages. Indeed, the RPI excludes the spending habits of those dependant on state pensions in its calculation, reinforcing its credentials as a working-age index. The rational argument behind the adoption of the CPI revolves around the assumption that pensioners would have already paid off their mortgages by the time they retire.

The CPI is currently at 3.4%. The Office for Budget Responsibility believes that by 2016, the CPI index will be running half the rate as the RPI, so if this is what pensioners are spending money on, they will be relatively better off than the population as a whole. If we adjust for inflation from RPI to CPI, the loss to taxation by inflation is an average £76 for these pensioners, or £1.46 a week.

The row over CPI or RPI has been smouldering even as recently as this month, but the point is, if you’re linking pensions to an index because it is most appropriate, then there is no logical argument why the tax threshold for the same group should be measured by the other.

Building upon this point, do any of these indices actually mean anything in regards to pensioners? A better solution, and one that is advocated by the GMB, is for the creation of a specific index designed around pensioners’ spending habits, that will exclusively apply to pension calculations. The introduction of such an index could bring to an end the kind of political nightmares Osborne has found himself in.

Alex Adranghi is Chair of the Young Fabians Future of Finance Network

Why do we defend the rich?

This Wednesday, Chancellor Osborne is set to unveil a Budget that promises to pit the rich against the poor in a manner not seen for decades.

One by one, individual policies have been brought into the light of public scrutiny and debated over by the great and the good: a cut to the 50p tax rate for those earning over £150,000, regional salary rates for public sector workers, and a freeze in the minimum wage for those under 21.

The expected budgetary measures conform to the Coalition’s guiding mantra that we must all share the burden of reducing the deficit. However, take a closer look at what is being proposed- and the spin doled up by the press- and it becomes clear that this budget is a recipe for making the poor poorer and the rich richer.

Reducing the top-rate of tax for the top earners in this country benefits the 275,000 tax payers who earn over £150,000 a year. It is true that those living on an income at the lower end of this spectrum are not the ‘super rich’, and that many are professional men and women like doctors and business executives who power the economy and serve society. However, it is also true that an income of £150,000 a year is seven and a half times greater than the median wage earned in this country (£20,801, calculated in 2009). To put this another way, anyone with a disposable income of £1million (approximately 13,000 Britons) has the funds available to furnish 48 individuals with the median salary for an entire year. The tax cut will pump anything from 2.4 to 6 billion pounds back into the pockets of this wealthy elite. The rich will get richer.

Meanwhile, the proposed measures to alter the wage rates of public servants depending on where they work will affect millions of workers in the North-East, North West, York & Humber, and Midland regions, where take-home pay is between 9% to 15% less than the UK average. A quick exercise in basic reasoning suggests that if you further reduce the earnings of people living in the poorest regions in the UK, they will have less money to spend on goods and services in the region, further depressing economic growth. The poor will get poorer.

Freezing the minimum wage for workers under 21 will have a similar effect. Young people will have to subsist on a poverty wage of £4.98 per hour while the costs of education and transport continue to spiral upwards. The minimum wage already does too little to provide workers with a decent standard of life- by making it discriminatory to the very section of the population suffering the highest level of unemployment, the Coalition is sending a strong message that it does not have a place for young people in its recovery programme.

What is interesting is that the press and the government seems to be continually siding with the rich over the poor, presenting strong arguments to abolish measures ‘oppressing’ the 1% of the workforce while rubbishing claims that this budget will persecute the 21% in the public sector, or the hundreds of thousands of economically active young people.

Why is this? Maybe it’s because we are pre-programmed to affiliate with the rich rather than the poor. After all, they’re the successful ones we all want to emulate. They’re the ones living the lives we so desperately strive for.

Adam Smith, enlightened political theorist and darling of liberal economists the world over, recognised this ‘natural’ affiliation himself, stating in his first work, The Theory of Moral Sentiments:

“When we consider the condition of the great…it seems to be almost the abstract idea of a perfect and happy state. It is the very state which, in all our waking dreams and idle reveries, we had sketched out to ourselves as the final object of all our desires. We feel, therefore, a peculiar sympathy with the satisfaction of those who are in it. We favour all their inclinations, and forward all their wishes. What a pity, we think, that any thing should spoil and corrupt so agreeable a situation!”

Smith recognised that, as bizarre as it sounds, that people are attuned to pity the rich- because we sympathise with them. Their successes are our successes. Their struggles are our struggles.

The plight of the poor is shuffled out of public view because we do not want to feel the guilt that comes from observing their sorry situation. We don’t want to feel bad- and that’s natural. Unfortunately, it also means that we’re far more willing to back calls to take the boot off the neck of millionaires than ask for similar respite for those earning the median wage or less.

It doesn’t matter if you agree or disagree with Smith’s theory. What matters is that there are many people out there happy to side with the rich over the poor. It will take intensive advocacy and determined campaigning to reverse this trend, but the struggle will be worth it if we can change the headlines to champion those who are truly in need.

Louie Woodall is Assistant Editor of the Young Fabians Blog

Why “too far, too fast” isn’t enough

In this member post, Stuart Clark argues that Labour needs to improve its strategy for opposing the Coalition’s economic policy.

The details of yesterday’s Budget are still being dissected, but the economic and political arguments are well under way. On the face of it the Chancellor’s measures seemed to offer help to the British public: increases in personal tax allowances and duty rate cuts amongst the most heavily publicised. Yet these measures pale into insignificance given the context of this budget – the weakness in the British economy and last autumn’s Comprehensive Spending Review.

Osborne’s “Budget for Growth” saw UK growth figures for current and future years revised downward. This is where the opposition should – and has – primarily focused: Ed Miliband’s response to the budget was barely three minutes old before we were hearing, yet again, how government cuts were risking the fragile recovery and were going “too far, too fast”.

But this sound-bite is inadequate in contesting the ideological basis of the government’s economic policy.

Ideology was all too apparent in yesterday’s Budget; the country’s economic problems were tackled in a market-orientated fashion by a government determined not to use the state to its full potential to help people.

Labour failed and is still failing to communicate effectively that the size of Britain’s deficit is not the result of overzealous public spending but a calculated economic decision taken to protect Britain’s economy from the loss of private sector demand and investment caused by a global financial crises and severe recession which followed.

Labour made a moral decision to use the power and resources of the state to shield the ordinary people of this country from the worst effects of the recession and in so doing accepted the need to run a deficit. As the private sector recovered, tax receipts would have risen and public spending could have been withdrawn – this was a viable strategy focused at preventing excessive unemployment.

The Chancellor’s rhetoric may be about growth, but if he really cared about it he would spare the country the cuts in public spending and increases in VAT, which will reduce demand and therefore harm our economy’s prospects.

Criticising deficit reduction as “too far, too fast” concedes the argument in favour of some sort of mandatory deficit reduction, something which Labour’s plan to halve the deficit in four years is also guilty of.

Reductions in public spending should be wholly conditional on growth.

Labour, by failing to articulate the success of the stimulus and the continued viability of UK borrowing in the short term, has made it far too easy for the Coalition to argue that cuts are necessary immediately.

And this makes it harder to expose the coalition policy as one of ideology rather than one of economics.

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A ‘maxed out credit card’?

Ahead of the Chancellor’s Budget announcement this week, Young Fabian Member Mark Anderson takes the coalition government to task over its positioning of its austerity measures.

One argument given by the UK government for its vast programme of public sector cuts is that the UK has ‘maxed out its credit card’.  Such a crude and misleading analogy bears no resemblance to the reality of Britain’s financial situation, yet it goes largely uncontested in public debate and serves to legitimise the devastation that is being wreaked on public services, the welfare state and public and private sector jobs and working conditions.

Far from the UK being no longer able to borrow money on the international financial markets, the interest that the UK pays on its debt is currently at a historically low level, as is the UK’s debt-to-GDP ratio. UK ten year bond yields are marginally higher than those for the US and far healthier than those for Australia and New Zealand, for example. In the run up to last year’s General Election, amid scaremongering about a potential debt crisis and the dangers of a hung parliament, yields on government bonds remained stable.

In a September 2010 article entitled ‘Can bond yields fall even further from these historic lows?’, Ross Watson, portfolio manager with Securities and Trust of Scotland told the financial journal Investment Week that:

“For the taxpayer, it is excellent news that the Government can fund its deficit at such low returns.”

Such sentiment presumes against a country close to bankruptcy.

Another argument the coalition government gives for frontloading public sector cuts is that it is unfair to saddle future generations with a mountain of debt. This argument is a perversion of the realities of private sector-induced deficits on several counts.

Firstly, it fails to take account of the fact that over 70 per cent of interest payments on government debt remains within the UK, going into savings and pension schemes – yours and mine.

Secondly, it bypasses the fact that you can’t cut your way out of a private sector-created budget deficit. Trying to do so simply condemns an economy to years of low growth – as seen in Japan over the last decade (when the Japanese government cut its stimulus too soon after recession, before Japan’s private sector had had a chance to recover) or in the UK in the 1930s (the last time that a post-recession public sector cuts programme was implemented in the UK on such a scale). Economic slowdowns make it harder to address structural deficits and repay government debt.

Thirdly, taking demand out of the economy when the private sector has not fully recovered risks a double dip recession which would increase government debt, not decrease it. Despite the Coalition’s best efforts to mislead the public, the UK’s structural deficit is a product not of Labour overspending, but of the collapse in output of the private sector following the collapse of Lehman Brothers in 2008.

Fourthly, at a time when the economy is already on its knees, it leaves the economy ill-equipped to compete against its healthier, better educated and better connected, more meritocratic international competitors.

Ending the previous Labour government’s fiscal stimulus, public sector cuts, a contraction in UK GDP at the end of 2010 and increases in unemployment and associated welfare payments, combined with the damage that the prospect of deeper cuts to come has done to business confidence and investment, have exposed the continued weakness of the UK’s private sector and led to a rise in government bond yields, thus further increasing the amount that the UK has to pay to service its debt.

Austerity is doing the opposite of what we are told it is aimed at achieving, and all this before the cuts have really started to bite.

A version of this post has previously appeared on Left Foot Forward.

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The Budget – Whats in it for young people?

Alistair Darling wants to ‘lead the young back to work’ in tomorrows budget, with incentives for re-training and re-skilling. But with career prospects and job opportunities looking worse as the recession deepens, it will be young people who will suffer the most in the tough economic climate.

Many Young Fabian members may have an undergraduate degree, or like me may be taking post-graduate qualifications to boost their employability, but for the thousands of new graduates leaving university in a couple of months, the employment opportunities that were available only a few years ago are disappearing fast.

Companies that are looking for new staff (and many are not) will be overwhelmed with quality applications from people with experience, knowledge and qualifications to match. Recent graduates and those in entry-level jobs will find it more difficult than ever to push forward with their careers and may decide to stay-put on a lower salary until the recovery starts. Anecdotally, after advertising recently for an intern in my office I received three applications from PhD students who were struggling to find employment which utilised their skills.

But this is not all doom and gloom, it offers Alistair Darling a real opportunity to make lasting changes to the prospects of young people in the UK economy and to release their potential rather than stifle it.

Young people are more likely than any generation before them to volunteer and offer their time to community causes and activities. This should be built upon by Labour and new incentives and rewards should be offered to young people to get involved with rewarding projects in their communities if paid employment is not always an option. Practical and essential skills and experience can be built up through volunteering at a charity shop or in a community project involving financial management skills and other soft skills like communication and presentation which employers are quick to pick up.

But the downturn must not be an excuse for pushing young people out of the classroom and into the job market. Education and training continues to offer a strong route to success for young people – across the board, from accounting to bricklaying – and should not be seen by Government as expendable. The Tories promises to slash public spending smack of knee-jerk reaction to a long-term problem. The most damaging thing government could do in the current climate would be to pull-back from funding projects like Building Schools for the Future, educational maintenance allowances, Train to Gain and other investments in education for young people. Now is the time to invest in future generations, not cut them adrift.

If you want to have your say on how the Government should respond to the recession, why not attend the Young Fabian seminar with Treasury Minister Stephen Timms on 6^th May?

Or if you can’t make it and want to ask a question, then post it here as a comment and we’ll make sure it gets raised.