After the significant spending cuts the government has made recently, people were hoping for some good news in the 2012 budget, released by George Osborne two weeks ago. Generally it seems as though the government has taken a more business orientated approach to the budget, encouraging enterprise. As expected however, Labour has said it is a ruthless assault on low income families. Ed Milliband named it a ‘millionaire’s budget’, but Osborne argued he is rewarding work with the measures he has taken. Lets take a look at some of the most significant changes.
Firstly, Income tax. The personal allowance, amount you can earn tax free, has increased to £8,105 for under-65s, up £630 on the previous year. Personal allowance has also increased for 65-74 year olds, 75 upwards and married couples over 75. Although the numbers may seem small, it will potentially encourage the labour work force to work more hours as an extra £630 will not be taxed. The limit on how much workers are taxed at the basic-rate of 20% has been reduced so that the amount you need to earn to become a high-rate taxpayer stays the same. Osborne also reduced the tax rate on earnings over £150,000 from 50% to 45% as he said the extra 5% raised ‘next to nothing’ for government and potentially meant some high earners left the country. If a majority of the high earners left the country, who would be left to pay the taxes? Osborne defended the decision to cut the top rate of tax by saying five times as much would be raised from the wealthiest by other tax and anti-avoidance measures being brought in
Other key budget changes:Corporation tax to fall from 26% to 24% in April 2012 and fall a further 3% in 2014, allowing businesses to retain more of their profits.Child benefit cuts to be phased in for families with at least one parent earning £50,000, and axed for those on £60,000,meaning 750,000 households will lose their child benefits. Although, families on this income earn considerably more than than the national average.Tobacco duties to rise by 5%, equivalent to 37p on a pack of cigarettes. Smoking causes self-inflicted disease which in itself requires long term and expensive NHS care. I am a not a smoker so have no issue with this tax.Fuel duty rise of 3p a litre to go ahead as planned.The fuel duty tax is a regressive tax as it affects the poorest in society more significantly. Fuel is already very expensive in the UK in comparison to other countries. Increasing the duty will have negative effects on the economy despite the fact it might improve the environment. If firms and people are unable to afford to run machines, transport goods or even drive to work, how do the government expect the economy to grow? Yes, fuel is bad from the environment and reducing it is necessary but fuel has become essential to everyday life and to business growth. When you consider that something like 60% of fuel cost is government tax, then it makes you wonder. Either the Government spends too much even now, or else we are in for higher inflation or lower growth as the UK becomes a higher cost place to do business. Anything that reduces the competitive nature of British business at this time is something to consider very carefully.
Additionally, the UK growth forecast has been raised to 0.8%, showing steady recovery from the recession and borrowing to be around £1 billion less than what was previously forecast. This is good news for the government as it seems the heavily criticised austerity measures have played a key role is recovering from the recession. One of the real issues is youth unemployment and as 50% of private sector employment is through SMEs, expanding SME’s will create employment. If the government were to focus more on real practical measures to support small business and encourage women especially to set up firms, the growth forecast could be further improved.
The severity of the current economic situation means measures have to be taken to improve economic growth and create wealth within the economy. Therefore, measures benefitting business and encouraging people to improve their own situations through increasing personal allowance, instead of increasing benefits and tax, wealth can be created. The top 10% of earners in the UK contribute over 55% of income tax alone, whereas the bottom 50% only contribute 11%, taxing the top 10% more so they leave the country might mean losing large amount of revenue for the government. However one place that must be chased up is clever tax avoidance but the big multi nationals.
Unemployment is a main concern at the moment and we will be able to see over the long term whether these budget changes have a significant impact to the UK economy.