Monday, March 28, 2011

A smoke and mirrors Budget

George Osborne: "look into my eyes, not around the eyes, into the eyes, you are feeling sleepy—now you are feeling wealthier..."

Many people have cautiously welcomed George Osborne's first non-emergency Budget, but the simple fact is that we are being soaked for even more money—it's just that George is clever enough to know how to grab the positive headlines.

You can see the key points on the Beeb website, but I would like to put some of the current situation in perspective.
  1. Fuel duty cut by 1p.
    Which is very nice for those who drive, but rather ignores the fact that the VAT rise in January put more like 3p on a litre of fuel. As such, both this cut and the scrapping of future taxes is hardly putting more money in people's pockets right now. Especially as some 62.2% of the price of fuel is already tax.

  2. Fuel duty cut to be paid for by increasing tax on North Sea oil producers.
    Now this is absolute pure barking insanity. From a personal point of view, it has hit some of my shares—although not to the extent that it has hammered City Unslicker (simply because I have less skin in the game).
    Today's budget has cost me £10,00 on the nose thank so to the collapse in share prices of our North Sea oil companies. Such companies have been doing really well of late, discovering bigger fields and eeking out a longer future for the UK as an oil producer—all the time with 50%+ of the profit going straight to the Treasury.

    But that alone is not enough for your humble Devil to describe this measure as lunatic—no, what leads me to make that comment is far more fundamental...

    As readers will know, your humble Devil is not—in any way—a trained economist. Nor have I read any books on economics. However, even I can understand the theory of supply and demand—and Timmy is able to explain how it applies to this situation with some force.
    Yes, that’s right, you’re taxing the excess profits of those who supply it thus making them, and possible new entrants, less likely to go and find more, so as to increase the supply and bring prices down.

    This is, you’ll have to agree, fairly stupid.

    What lifts is up into the realms of rampant lunacy is that the money so raised is going to be used to reduce the price of the fuel itself: that is, to increase demand.

    So, our solution to prices rising because of tight supply and increasing demand is going to be further restricting supply and increasing demand.

    Quite simply, with fuel prices lowered, people will buy more of it—demand increases. But Osborne is going to tax the suppliers of this good, so that they produce less of it. Is the man a complete moron?

    This lunacy is further compounded when you consider how much the Coalition has been wibbling on about "energy security" and all that other bullshit. The man's a nutter.

  3. Personal Tax Allowance rise.
    So, let us move on from fuelling this fuel fuckwittery and edge cautiously into the realm of personal taxation. In the emergency Budget last June, Osborne raised the Personal Tax Allowance to £7,475...
    ... worth £170 a year to basic rate taxpayers. It is expected that 880,000 of the lowest-paid will be taken out of income tax altogether...

    ... and effective this April; and from next April, the PTA will be raised by another £630 to £8,105. Which is nice.

    However, what has been rather less dwelt upon is the fact that National Insurance—for both employers and employees—is going up by 1% to 12% and 13.8% respectively. My humble salary sees the following changes (calculated by Listen To Taxman):
    • 2010/11: Income Tax of £4,905.00 and National Insurance of £2,780.80 = £7,685.80
      Employers' NI Contributions: £3,968.00

    • 2011/12: Income Tax of £4,705.00 and National Insurance of £2,852.64 = £7,557.64
      Employers' NI Contributions: £3,302.06

    • Total: I am up by £128.16 a year, apparently. And my employer seems to be too—which is odd... Is this right?

    Perhaps the "squeezed middle" is not quite so squeezed? Except, of course, that I am not really much better off since the VAT rise makes just about everything that I buy 3% more expensive than it was in December 2010.

    As with the fuel duty, the Chancellor has made a headline-grabbing reduction in one tax, to mask the fact that he is taking much more from us elsewhere.

    However, these large rises in the PTA are actually rather clever from a PR point of view since they have alerted people to the fact that such allowances exist and can be significant. If a Labour government were to come in and reverse these rises or, as Nulabour did, simply limit them to below inflation—measures which would explicitly hit the poorest hardest—they would be in a very difficult position.

  4. Consultation on the merging of Income Tax and National Insurance.
    This has been mooted for the last few months—or rather longer by both the Adam Smith Institute and UKIP—and is a definite plus as far as your humble Devil is concerned.

    As I have long pointed out, although NI is supposed to pay for your pension, your healthcare and your unemployment benefit, it does not. In reality, there has never been a National Insurance Fund and NI is simply another tax—a colossal £120 billion per annum Ponzi Scheme.

    What it has allowed certain governments to do—as with the below-wage-inflation PTA rises—is to raise more tax whilst dropping the headline rate of income tax.

    What this measure would do is to drop the pretence that NI is anything other than an income tax, thus making it far more difficult to raise direct taxes by stealth.

    It would also hammer home to people that NI does not pay money into a fund for your use but into the general pot of cash for government-delivered services that you access on sufferance.

    It would also bring home to the population in general just how much they pay in direct taxation. A slight caveat, however: as Dizzy points out, despite the glee of pro-campaigners, one would not, in fact, be paying a 32% rate of income tax.
    You see, we have, irritatingly, a progressive tax system. That means you pay NI on the gross before tax. Then you pay Income Tax on the taxable amount, which is the gross less the free 7Kish. Then you pay one rate on the next 20 odd thousand. If you go up into the 40% rate you only pay it on the amount you are in it by.

    In other words, if you earn £1 over the threshold you would pay 40p to the taxman on that £1. Horribly confusing I know.

    Anyway, the bottom line here is that not even someone earning £150,000 per year pays 52% of their income in taxes. In fact, someone on £150K (the 50% tax rate) will pay a combined amount of NI and Income Tax to the tune of £58,900, that 39% of their earnings in tax. Someone on £50K (the so-called 40% higher rate) will pay £13,910 in NI and tax, that's 27% in total.

    Now don't get me wrong, I still think that is way too much. However, trying to win the argument for lower taxes on the basis of exploiting the confusing nature of a "progressive" system to make it sound much worse than it is is the wrong argument to be making because you'll be called on it.

    A much sounder platform to be on is to make the case that the tax system is so utterly confusing that tax rates should be flatter, instead of this crap where you pay a percentage on the gross, then you get a pay one rate on one part, and another rate on another part, less your free part.

    And, of course, this is the other big bonus: such a system would be far simpler to administer, thus allowing the state to get rid of a goodly number of pointless pen-pushers thus leading—hopefully—to a lower rate of tax altogether.

    I wouldn't hold your breath though—with 32% being the figure bandied around, I wouldn't be surprised if that it where it starts.
  5. Corporation Tax dropped by 2%.
    As a shareholder in the company that I work for, I naturally applaud any cuts to Corporation Tax: in fact, I am (in theory) a double winner here since, as we all know (don't we...?), that the actual tax burden ("incidence") of Corporation Tax falls on two groups of people: the workers (some 70%) and the shareholders. Being both, this move will—in theory, I stress—make me rather better off on two fronts.

  6. R&D Taxes Allowances.
    Another rather good piece of news for our business are the changes to Research and Development taxes, as highlighted by Timmy at El Reg.
    Here's (suitably adjusted for the new rules) what HMRC says about the scheme:
    [T]he tax relief on allowable R&D costs is 200 per cent – that is, for each £100 of qualifying costs, your company or organisation could have the income on which Corporation Tax is paid reduced by an additional £100 on top of the £100 spent. It also includes a payable credit in some circumstances.

    That's really rather attractive: if you're paying £100k in R&D a year, and making £100k in profits even after doing so, then you've just wiped out your entire tax bill.

    Now, this is rather super, to be honest. In my day job, one of my many hats is that of (effective) head of research and development*; as such, one of your humble Devil's yearly rituals is to write our R&D submission to the government, upon which we get a pretty decent tax rebate (mainly on people's salaries).

    Whilst the amount of R&D that we do is hardly likely to wipe out all tax on our profits, it should go some way to mitigating our liabilities—and thus allow us to invest even more into creating even better software.

  7. Pension Age.
    One of the final things that I am going to comment on (it hardly seems worth mentioning that "sin" taxes are going up again), is the proposed rise in pension age. Once again, Timmy's Register article explains what this is about.
    Almost everyone therefore expects to live to an age to collect a pension: it has become assurance instead of the original insurance**. The proposal therefore is to tie (as some other places, Denmark among them, already have done) the pension age to the average age of death. In a perfect world, to the average age of death of the previous cohort... Thus the pension becomes what it was originally, insurance against outliving your rational level of savings.

    A useful byproduct of so limiting the concept is that it could become a reasonable and serious payment again. If it is something that's paid to only half of old people and paid to all only for six or seven years rather than 12 or 14, then it could be more generous, while still reducing the total cost.

    Yes, this is rather bloodthirsty, but something must indeed be done about the long-term costs of rising lifespans.

    Bloodthirsty it may be, but the scale of the government's pension liabilities is truly terrifying: it is the largest component of the various studies that have put the British state's true debt at somewhere near £8 trillion—a truly colossal sum that is roughly six times our yearly GDP.

And on the question of the public debt, the news is not so good...
2011 growth forecast downgraded from 2.1% to 1.7%

2012 forecast also down from 2.6% to 2.5%

Forecast borrowing of £146bn this year, £2.5bn lower than anticipated

Borrowing to fall to £122bn next year, dropping to £29bn by 2015-16

National debt forecast to be 60% of national income this year, rising to 71% in 2012 before falling to 69% by 2015

As Booker highlighted this weekend, despite the optimistic projections, the government is still spending money like water.
Despite the general impression that our new Government is cutting back on public spending – as Channel 4’s Jon Snow put it, we are facing the most severe cuts since World War Two – the Budget revealed that our spending will in fact increase even faster than we were told it would last October.

In the small print of last year’s spending review, Mr Osborne told us that annual spending was due to rise from £696 billion to £739 billion in four years’ time. In the small print of last week’s Budget, spending is projected to rise from £694 billion this year to £743.6 billion in 2014-15, an increase of some £50 billion.

Then there was Mr Osborne’s claim that, to encourage small businesses, he is planning to save £350 million by scrapping unnecessary regulations. What again only emerged from other official sources was that, as usual, “deregulation” cannot include any regulations originating from the EU, although these now account for the vast majority of our regulatory burden.

This point was neatly put forward by England Expects.
The Government has set great stock by its red tape cutting approach. One in, One out is the cry. Here is the Department for Business, Innovation and Skills statement from last year,
a new approach that will control and reduce the burden of regulation. A “one-in, one-out” approach, designed to change the culture of government, would make sure that new regulatory burdens on business are only brought in when reductions can be made to existing regulation.

Pretty good stuff you must agree.

Indeed. And more hope was engendered when iDave Cameron pointed out that we needed to stop the "huge amount of regulations—particularly coming out of Europe." Hoorah!

Unfortunately, this is but a pipe dream, as Priti Patel found out when she asked a question about this "one in, one out" rule.
Priti Patel (Witham, Conservative)
To ask the Secretary of State for Business, Innovation and Skills whether his Department's one-in, one-out policy applies to EU regulations.

Fair Question one might have thought, what with the Government being so proud of this policy. The answer? Ah that is a little difficult,
Mark Prisk (Minister of State (Business and Enterprise), Business, Innovation and Skills; Hertford and Stortford, Conservative)
At present EU measures will not be counted as INs unless a Department exceptionally imposes a measure that goes beyond the minimum requirements (i.e. if it is gold-plated, in which case the gold-plated element will be cost as an IN). Existing EU legislation can be counted as an OUT if it is repealed or revoked, or if gold-plating is removed or if a derogation that imposed costs to business is voluntarily curtailed ahead of its maximum term expiring.

So that is a No then.

Poor Priti, there she is asking the right questions, and even getting interesting answers, but what can she do with them? If she goes public the whips will crush her kittens.

And Booker spells out just how much these EU regulations might cost us.
Then there was Mr Osborne’s claim that, to encourage small businesses, he is planning to save £350 million by scrapping unnecessary regulations. What again only emerged from other official sources was that, as usual, “deregulation” cannot include any regulations originating from the EU, although these now account for the vast majority of our regulatory burden.

Coming into force next October, for instance, will be the Agency Workers Regulations, implementing a 2008 EU directive giving temporary workers similar employment rights to full-time employees. This was fiercely resisted by our Government at the time because it will hit Britain much harder than other EU countries. The Government’s own estimate of its annual cost is a staggering £1.9 billion. So, while the Chancellor boasts about saving £350 million, what he doesn’t mention is that the cost of just one EU regulation which we cannot repeal will be nearly £2 billion a year.

Not to mention the fact that we are on the hook for the bail outs of Eurozone countries—a measure that our rat-faced Chancellor nodded through.
Then there was the peculiar farce of David Cameron’s trip to Brussels last Thursday, to sign up to an amendment to the EU Treaty creating a European Financial Stability Mechanism. Under this, it is estimated that we may have to stump up £5 billion to help bail out countries such as Portugal, the latest victim in the slow-motion collapse of the euro, even though we are not in the eurozone. (Weren’t we meant to be given a referendum on any further amendments to that EU treaty?)

Ah, no, Christopher. You see, as I pointed out, there are any number of excuses that the government can deploy to get around their pointless referendum lockDouglas Carswell enunciated a number of them, so feel free to take your pick...

Anyway, to return to the point of this post, overall the Budget was not too bad—despite containing a number of barkingly insane measures. However, the EU remains the elephant in the room, issuing regulations that not only threaten to stifle the Coalition's plans for lighter business regulation but also puts us on the hook to for a likely imminent bail out of Portugal—which could wipe out a great deal of the Coalition's proposed savings.

If we are also required to dip into our pockets to shore up the collapse of the increasingly creaky-looking Spain—whose banks are suspected to have a €100 billion exposure to Portuguese debt—then we will be in real trouble.

Intimately linked to the EU, of course, is the whole Green agenda.

Can we leave yet...?

In the meantime, there are two other Budget points that I want to mention, although I may cover the former in more detail later: that is the move "to introduce a carbon price floor for the power sector". Quite simply, this will make power a hell of a lot more expensive than it currently is—and it has risen considerably over the last ten years.

A rise in power costs will lead to considerable cost rises in just about every damn thing—wiping out any tax advantages that you might gain, and driving inflation upwards.

The final point have been condemned—like the tax on North Sea oil companies—as a piece of absolute insanity...
The Firstbuy scheme would see the government and house builders offer loan help for first-time buyers purchasing a newly-built home.

Buyers must save a deposit worth 5% of their property's value, with the government and housebuilders putting up 10% each through an equity loan, enabling people to qualify for 75% loan-to-value mortgage.

The equity loan would be interest-free for the first five years, with interest charged at 1.75% in year six, and at inflation plus 1% thereafter.

We have just had a near-complete economic collapse driven by people buying houses that they cannot afford: what the government is proposing to do is to help people to buy houses that they cannot afford. However, to many people this measure would appear to be a sensible one.


Well, despite the supposed problems with bad mortgages, we have not actually seen much of a house price crash in this country—and certainly not in the more affluent south east. However, we have seen a severe contraction in lending by the banks, meaning that first-time buyers are, indeed, finding it difficult to get a mortgage.

This, of course, has impacts all the way up the chain: if the buyers of your first home cannot get a loan, then you cannot sell your first home. And, if you cannot sell your first home, the likelihood is that you will be unable to move to your next house. And the owners of your next house will not be able to move to their next house if you cannot buy theirs, and so on.

As such, as people find it harder to get loans, we will see a truly colossal house price crash start to move through the system. Which means more bad mortgages, the housing market grinding to a halt, builders going to the wall and banks collapsing again.

So, Osborne's proposed idea might be seen to be quite sensible. Except for two things...
This would be funded by the levy on banks, Mr Osborne said. Some £210m will be spent in England, with the other £40m in Wales, Scotland and Northern Ireland.

Riiiight. So, what Osborne will do is to take money from the banks, giving them less capital to lend; he will then filter it through government bureaucracies—which will significantly reduce the amount of money available—and then hand what remains to people so that they can give this reduced sum back to the banks from which it was taken in the first place.

That's absolutely fucking brilliant, George. You moron.

Second, I believe that this fund is only available to those purchasing new builds—which is fine for the building industry, but does absolutely nothing to help the general housing chain. So, despite this £250 million, you still won't be able to find someone to buy your first home so that you can move on to your second.

Let's all look forward to that super new crash, shall we?

Overall, this Budget could have been worse, but let us not delude ourselves—economically, Britain is still in pretty dicey waters. And I fear that is it going to take rather more than this to enable Britain to prosper again.

But, on the bright side, at least George Osborne is not Gordon Brown or Ed Balls...

* Actually, I am the Product Manager but, in a small company, that means that I lead the Development team and, at least partly, design the software. Part of my remit is to understand our customers' needs, the market at large (including the politics) and the wider technological developments in the web software world. As such, I effectively lead research and development for the company.

** As Timmy explains in the article, assurance is payment against something that will happen, e.g. your funeral costs. Insurance is payment against an event that might happen, e.g. a meteorite falling on your house.


Tomrat said...

Thanks for the mention DK; yup, I refuse to get mad at petty station owners- there're fewer more pathetic souls in the private sector, cept maybe pub landlords.

microdave said...

But they don't want us to buy more fuel - it will only create more nasty CO2, and we all know what that does!!

Remember the coalitions plan to be the "Greenest Government Ever" - once they've destroyed all our remaining industry, and priced everyone out of any form of transport, that ambition will be realised....

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