The Budget (UK)
Today (26 November) is Budget day here in the UK. Several so called leaks have it that the two child universal credit cap will go and taxes go up. Some are saying that both the Chancellor and the Prime Minister will go if they don’t get this right. They need to pull an elephant out the hat not a rabbit to change attitudes.
Comments
The State Pension is going up by around four times the rate of inflation though. I guess they want retired people to be dependent on the state rather than private pension schemes.
My understanding is that the limits on cash ISAs are meant to encourage people into investing more e.g. in stocks and shares ISAs. For long term financial security this is probably a good general direction to be pushing, though of course it risks further asset price inflation.
The people chucking loads of extra money into their pension are not, by and large, people likely to be worrying about financial security in old age. I think the restriction on salary sacrifice is aimed at people using it to subsidise their purchase of top-of-the-range racing bikes and the like.
Cynical, moi?
Well, it fits in with Reeves idea that there should be more investment in UK companies, but the problem with that idea is that the reason for the lack of investment has been the lack of returns.
That measure is specific to pensions though (and fwiw around 60% of all companies in the UK operate salary sacrifice schemes for pensions specifically).
Not sure what's so terrible about dropping the cash ISA limit to £12,000 a year - are there really people who can afford to save over £1000 a month?
Will this budget encourage spending? I don’t think so. We need to keep money going round to pay staff etc.
Indeed it is specific to pensions. And £2,000 a year is really not that much - assuming a 5% salary sacrifice being put towards ones pension (not an unreasonable amount, and many people may well currently choose to put more in to improve their chances of a decent life after retirement) it equates to a salary of only £40,000 per year before tax.
Thanks for the clarification - salary sacrifice for other matters had been mentioned before the budget so I got mixed up.
From what I've read it sounds like the change is just to move salary sacrifice pension contributions into the same bracket as regular ones i.e. you pay NI on them but not income tax, because it remains the case that you pay income tax but not NI on pension income. But I may have misunderstood that too!
The problem is that leaving personal allowances as that by increasing the number of people falling into the higher rate of tax you further disincentivise an increase in industrial productivity.
When it comes to lowering the cash ISA limit in a bid to increase investment into stocks and shares products, thinking it will boost investment in industry, this will only work if she can tackle the mind-set of fund managers to think long-term. One of the things that holds back industry in the UK is investor short-termism. It would make far more sense to have tax bands on profits that taper with the length of time a stock is held, and bigger alllowances for R&D.
Really? Why? Surely it encourages people to seek higher wages to offset paying more tax and thus incentivises productivity?
Modest changes in effective marginal rates of tax are unlikely to have a strong effect on behavior. Artificially high spiky marginal effective tax rates are much more likely to alter behavior. People who make £100,000 are certainly well off, and could afford to pay a few extra quid in tax. But the personal allowance is removed at a rate of 50p for every pound of additional income here, which is effectively an additional 20 percentage points of marginal tax for incomes between £100,000 and £125,000. After £125,000, the marginal rate drops down again. That's a stupid tax structure. The consequence is that if you look at the annual reported income of UK taxpayers, there's a big spike just below £100,000. People do appear to choose not to do extra work when facing effective marginal rates above 60%.
There is only one point in the tax system where tax would take "most of" an increase, and that is if you're in the fortunate position of earning over £100k and fall into the personal allowance clawback. Even then the effective rate is lower than for, say, someone on Universal Credit.
The spike in people reporting taxable earnings just below the 100k threshold is in large part people pumping money into pensions and other tax avoidance mechanisms rather than avoiding pay rises or cutting hours.
Exactly this.
The effect of holding tax thresholds down on behaviour is hugely overstated* by parts of the media and people with an agenda.
It is a tax increase - all other things being equal - it is a real terms tax increase for nearly everyone but there are some important caveats to this:
Firstly, unlike a hike in the rate, it does not translate into a drop in cash income. Secondly, it is not automatic and only kicks in when someone has a pay rise. If you are not getting your inflation rise, then you don't pay any more tax. I think this important as pay rises do not happen automatically for most. Thirdly, because the higher rates (i.e. 20% vs 0% and 40% vs 20%) only occur on the additional income, it is a very small difference to overall income for an individual.
There are two places where people are likely to feel it: firstly if it means that a pay rise ends up being less in cash terms than they might have expected; that can be disappointing and secondly, where having gone into a higher rate, the tax on extra work on top feels more burdensome. I.e. Previously, you may have been paid £160 for some extra work, it now becomes £120.** That will disincentivise some but not others. We all make decisions about extra work, based on how valuable the time/effort is to us vs spending time doing other things such as time with the family.***
More importantly, and not talked about nearly enough by the pundits (you really have to go digging to find this out) is that in both budgets Ms Reeves has put a lot of money into capital investment. That's what really matters in the long term. The reasons why the UK economy is struggling so much at the moment are simply these:
1. Austerity (when capital investment suffered most of all)
2. Brexit
3. Covid (a combination of government ineptitude and waste and the long-term effects on the working-age population)
4. Ukraine
5. Trump
That's in chronological order but probably that's the correct one in terms of magnitude of the effect of each as well.
The long-term stuff is far more important here than the changes in income tax and NI.
The other thing is that the debate about fiscal rules is completely wrong. They are really important in terms of managing market expectations and thereby controlling the cost of borrowing for the government and the private sector. Reeves has worked hard to ensure that the overall picture is one of 'sound money.' She should not be attacked for that approach and understanding the need to maintain that financial credibility. The issue is that she set herself relatively bad fiscal rules and she could and should have made better ones.
AFZ
*This is mostly opinion. I believe it is well-grounded opinion based on what I have read and thinking about this properly. The basic reasoning is laid about above and I think is sound. However, it should be caveated that it is a logical argument rather than something I am demonstrating by evidence. I am sure this has been studied and I will have a look to see what I can find.
**Simple maths here that £200 gross pay subject to a 20% rate becomes £160 net, whilst attracting a 40% rate makes it £120 net. (Just income tax, ignoring NI for the sake of simplicity here).
***'All' might be incorrect. Many people work in jobs where extra earning opportunities don't exist. I want to acknowledge that but the principle is sound and how much personal A wants for an extra hour of work is different to person B and will depend on multiple other factors as well.
Are you seeking to distinguish between the way that our behaviour is influenced by the way we think about income in nominal terms, compared to the way we think about the tax we pay in real (or realer) terms?
The correct critique is that this was done for largely ideological reasons ('third way') and led to a more expensive outcome in the longer term. It's not true to say that it gave a 'false impression of national prosperity' -- it would have been perfectly possible for institutions - possibly backed by local or national governments - to build these facilities themselves, and doing so would have created a stream of earnings into the future (as well as lowered overall cost).
The reason for addressing this in the here and now is that I see that the UK government is still attached to this thinking, with large amounts of announced capital investment actually consisting of de-risking private provision in a way that has a lot of downside, followed by cost into the future. The various shocks of the last few years (Covid, Trump, Ukraine etc) are an argument for more state capacity rather than less.
Some quickly became very costly debacles, eg the public/private partnerships for maintaining the London Underground.
Right, but the point was they were affordable - it's more like the situation where someone could have gone to a bank and got a sustainable business loan to invest, but instead chose to go into business with someone who had 'The' as one of their middle names.
My point was twofold. The minor point was that an additional benefit of raising revenue through freezing thresholds is that it harms less those whose pay is not keeping up with inflation. If you put the rate of tax up then your taxes go up even as your real income falls.
The major point though was to counter the narrative that these changes affect behaviour in a way that harms productivity. I don't believe that logic holds and so far I have found zero evidence to support the idea that people will significantly change their behaviour because of the freeze.
AFZ
This isn't a narrative I've come across. (It's probably not where where I'd think to start, looking at the relationship between pay and productivity.) Poking around:
Which papers? The tory/reform ones, perchance?
These things are far from an exact science and tend to depend on time frame, assumptions and current estimates of things like growth (and remember that some of the extra taxes only kick in years down the line).
That's not what they are talking about when they are talking about a deficit; they are referring to a difference between the levels of taxes and the levels of spending.
Indeed.
In fact, this is the key to so much of this.
Reeves is being extremely unfairly treated.
When it suits the agenda, the OBR is dismissed as being constantly wrong. This is not true. When it suits their agenda, the OBR's pronouncements are gospel. This is also not true and not even close to what the even the OBR would claim about itself.*
The VOX pop approach and ill-informed commentary we get are not journalism. Asking people how they feel about the budget and what they think produces no light but lots of heat, serves a purpose but it's not informing the public. It is entirely predictable that if you look at actual facts, people will be saying that they don't like something in the budget because of x, y or z. In truth x will not affect them, y will actually make them better off and z they've totally over-estimated the effect on their personal finances. Even the most experienced and best-informed experts are unable to know what stuff really means 5 minutes after the chancellor sits down. However, the angry man or woman in the street makes great copy. The problem is that for the rest of the public, this is all the reportage they get - this is the story.
Similarly, the opinion pieces tell you everything about the writer and next-to-nothing about the subject matter.
It is also noteworthy how so many of the commentators who wish you to believe that Reeves is to government finance what Herod the Great is to child care are the ones who told you that Liz Truss's / Kwasi Kwarteng's budget was the best thing since sliced bread.
This is probably a fair summary of the actual facts here: https://www.bbc.co.uk/news/articles/cewjkv8jylko
Now, I want to be very clear on something. Whilst it is obviously true that any politician will spin facts in a way that suits them, it is also true that a sensible and wise chancellor who is interested in good governance** will always look at the most pessimistic end of any economic modelling as part of their thinking. They may not want to work on that basis alone but they have to at least think about it. As a counter point, Hunt based a lot of his budgetary arguments pre-election on extreme optimism. And it should never be forgotten that the NI rise that Reeves gets slated for so much last year was essentially reversing a completely unfunded cut by Hunt as a pre-election bribe. Similarly, I can show you (I have the numbers) how in every single budget, Osborne kept using overly optimistic projections and was proven wrong every time...
So, I will pose this as a simple question: Do you think the media is using the same measure for the current chancellor as they used for previous ones? Are they informing the public?
AFZ
*The OBR does what all economic modelling does, which is produce a range of forecasts. It is deeply misleading to say that because the real world experience is not exactly in line with the central forecast that the OBR is wrong. If a weather forecaster said that it will rain at 3pm and it rained at 4pm is it fair to call that wrong? Maybe, maybe not. But if they actually said "(Based on the data we have and our best model) it will rain sometime between 1pm and 6pm but most likely 3pm" then it is simply a lie to say that the weather forecast was wrong. This is basically how 99% of the media reports economic forecasting. Firstly, they don't understand what they are reporting and then they misrepresent it.***
**One might even choose the adjective 'prudent' ;-)
***There is a wise saying: "Never underestimate the ability of someone to not understand something when their livelihood depends on not understanding it."
As a disabled person I do not feel sorry for the person gleefully trying to destroy disabled people's lives, and you shouldn't either.
This works both ways, Starmer and Reeves run with the same playbook. Invoking the OBR when it comes agrees with their political choices and then ignoring it when it doesn't:
https://obr.uk/box/the-impact-of-migration-on-the-fiscal-forecast/
(Her economic policy assumes it will be around 340K, it's already dropped to around 200K and the government in the shape of Stamer has expressly said they want to get the number down even further).
I'm not sure speculating about motives is helpful. At some point the purpose of a system is what it does.
I dont care if the right wing press get her. Good riddance - and they themselves are also a plague, and deserve to be ignored and destroyed. It would be nice (to echo the old parody) if they could all
'go away and sin no more - but if the effort be too great, go away at any rate'
I'm not sure it's much better if you reduce the choice to malicious or stupid. They've chosen their politics and who they choose to listen to, actual policies are downstream of that.
Reeves' hatred for anyone who needs to claim benefits has been public for at least a decade.
Right, but her politics comes first, it's just a terrible politics and she'll inflict it on your for your own good (well actually her own good).
Somehow I dont think they just tripped on a snowy doorstep in their dressing gown and accidentally impaled themselves on a frozen sharpened copy of the Daily Mail (Not To Be Taken Internally) and accidentally got Blackshirt poisoning from it.
Starmer and Reeves' Labour government has been openly practicing hard right scapegoating/ moral panic whipping up tactics against minorities marked for attacks by right wing media for some time now.
That does not happen by accident and unawareness. Politics by demonising and scapegoating vulnerable less powerful groups is a choice - it's a choice to be a far right party to attract votes from a mix of ignorant, cruel and gullible people who have been led to falsely blame their misfortunes on innocent others and who want to see those others hurt and punished.
It's completely immoral.
Minority scapegoating is not something left wing people can have a bit of 'as a treat' or 'an accident'
As Judith Butler put it
It's not an accident. They're far down that road. It's what has been euphemistically called 'populism' because people look at you funny if you use the more accurate 'fascist'. But Butler is right about it.
I think both Reeves and Starmer have a very instrumental view of other groups to the point where they treat them as objects in their pursuit of power, and their goal - to displace the Tories as the natural party of government.
Which is why Starmer was willing to lie to the membership, it's why he whipped against opposition to things like the Overseas Operations Bill (see current news about the SAS, senior politicians obviously knew that was going to blow up at some point), it's why he was completely tone deaf to the language in the "islands of strangers' speech.
And political journalism seems to be all about gossipy tittle-tattle about who said what to whom.
I find it very difficul to get engaged without having the sensation that I have been soiled in some way.
They may well do, but to reinforce an earlier point, on another level it doesn't really matter.
Cruella de Vil might want her dalmatian fur coat because she's a callous vain animal cruelty enthusiast or maybe because she thinks prancing around in the coat on telly will look stylish and convince lots of animal cruelty enthusiasts to like her and vote her into power, but either way if you're a dalmatian, you're still going in the coat.
Morally it's possibly even worse to be cruel not because you have been brought up that way and have little insight or are ignorant and have been conned into thinking it's OK, but actually because you've made a cold political calculation that cruelty works as an electoral tool. I think it's more culpable but in the end the ill effects on those targeted are still the same. You get skinned and put in the coat.
I agree, I only make the distinction to underline the futility of those who want to appeal to their better nature.
Then they are talking about the wrong thing. Government should get the public services right and generate taxation and other income to cover it. Then fail to get elected next time round because all the electorate care about is what they are told about the damage that this straightforward and decent policy would cause them because thanks to the legacy of Margaret Thatcher it's all about me me me and not about looking after everyone.