Osborne Needs 5 Billion Pounds to Fund U.K. Budget Giveaways
U.K. Chancellor of the Exchequer George Osborne will need to claw back about 5 billion pounds ($8 billion) a year, largely from the wealthy, to fund giveaways he’s suggested will feature in his annual budget today.
Osborne will have to raise more than 2.5 billion pounds a year if he cuts the top income-tax rate to 40 percent from 50 percent, a step sought by lawmakers from his Conservative Party. Increasing the starting point for paying income tax by 1,000 pounds to please the Liberal Democrats in the coalition would cost another 2 billion pounds, according to Treasury estimates. Measures to compensate some middle-income families for the loss of child-welfare payments might need 1 billion pounds.
“To pay for this, the rich are likely to be squeezed further,” Vicky Redwood, chief U.K. economist at Capital Economics Ltd. in London, said in a note to investors. “A clampdown on stamp-duty tax avoidance, a tax on more expensive houses and a further cut in tax relief on pension contributions all look possible.”
Osborne, who speaks to Parliament at 12:30 p.m. in London, is constrained by his commitment to keep Britain’s AAA credit rating. He told other ministers in Prime Minister David Cameron’s Cabinet during budget negotiations that he will not borrow more money to finance tax cuts. Earlier this month, Fitch Ratings added to warnings from Moody’s Investors Service that Britain’s top rating carries more than a 50 percent chance of a downgrade over the next two years.
The budget deficit unexpectedly increased in February as taxes fell and spending surged, the Office for National Statistics said in London today. Net borrowing excluding support for banks was 15.2 billion pounds, the highest for any February on record, compared with 8.9 billion pounds a year earlier. The median of 17 forecasts in a Bloomberg News survey was 8 billion pounds.
Bank of England policy makers Adam Posen and David Miles maintained a push to increase the bank’s target for bond purchases to stimulate the economy this month as the majority favored waiting to monitor the “substantial risks” to the medium-term inflation outlook, according to the minutes of the Monetary Policy Committee’s March 7-8 meeting published today.
The Treasury prolonged austerity plans in November beyond the 2015 election, with an extra 15 billion pounds of spending cuts over the two following years to eat into the extra 158 billion pounds of borrowing needed because of weaker-than- expected economic growth. Osborne has said the wealthiest will have to shoulder their share of paying that debt back.
Budget cuts announced since the coalition came to power in May 2010 will see more than 700,000 public-sector jobs axed in the tightest fiscal squeeze since World War II. Osborne is seeking to erase by 2017 the bulk of a deficit that’s more than 8 percent of gross domestic product.
Abolishing the top rate of tax would cost the Treasury as much as 2.7 billion pounds in the 12 months starting in April, according to budget documents prepared by the previous Labour government in 2010.
Osborne will cite new estimates today compiled by the tax agency based on how much the top rate has actually raised since it started in 2010. Newspapers including the Guardian say the report will conclude millions, rather than billions, have been collected.
“It doesn’t bring in any revenue at all” because people have moved abroad to avoid it, a former Conservative chancellor, Nigel Lawson, told BBC Radio 4 today.
Critics of the 50 percent rate, paid on personal income above 150,000 pounds a year, include London Mayor Boris Johnson, a Tory who’s running for re-election in May. They argue it is a disincentive to entrepreneurs, encourages tax evasion and risks diverting investment abroad. The levy has given Britain a higher marginal tax rate than the U.S., Germany and France.
“It is completely the wrong priority to cut taxes for the richest people in Britain,” the opposition Labour Party leader, Ed Miliband, said in a statement today. “What the chancellor must do is ensure that every penny he can raise from those at the top is spent on helping millions of ordinary families who are struggling to get by.”
Liberal Democrats including Business Secretary Vince Cable have said they will back the tax cut in return for speedier adoption of a coalition agreement to lift the amount of income that is free of tax to 10,000 pounds by 2015. A 1,000-pound increase from the 8,105-pound tax-free limit planned for the next fiscal year would cost about 2 billion pounds a year, according to Treasury estimates.
Earlier this month, the Liberal Democrat leader, Deputy Prime Minister Nick Clegg, suggested the government might soften cuts to child-benefit payments for families with at least one parent paying the middle 40 percent income-tax rate.
Under the existing proposal, due to come into force in April 2013, a couple each earning 40,000 pounds would keep the payments, whereas a neighboring household with a single income of 43,000 pounds would lose them. When he announced the policy, Osborne said the alternative would be “a very complicated means test,” arguing it was right for the better off to bear the burden.
While Osborne says the measure will be implemented, he’s suggested he will take steps to soften its impact. The Treasury said in last year’s budget that the step would save about 2.4 billion pounds in the fiscal year that ends in March 2014.
To begin financing the gaps, Osborne promised on March 18 he’d take “extremely aggressive” measures to stop tax avoidance, particularly on property transactions. He highlighted the “completely unacceptable” practice of buying homes through a company to avoid paying stamp duty, which amounts to 5 percent on homes changing hands at more than 1 million pounds. People who game the system will face “a very punitive charge,” he said.
The BBC reported today that stamp duty might rise to 7 percent on purchases of property for more than 2 million pounds.
In addition to the stamp-duty measures, Osborne will also say he plans to introduce a general anti-abuse rule to limit tax avoidance, according to a person with knowledge of the matter.
Still, those measures may not suffice to finance the tax cuts and child-benefit relief, and Osborne has the option of introducing new levies to raise the extra revenue.
Cable has said he favors a levy on property valued at more than 2 million pounds, known as a “mansion tax,” which could be levied by local government and become part of the existing council tax on property or be raised directly by central government. Clegg has called for a “tycoon tax” on high earners, without giving details.
A ComRes Ltd. poll found 64 percent of people saying they believed they’d be worse off after the budget, 61 percent that the government was out of touch with the economic needs of the public and 59 percent saying that the budget will look after the rich more than the poor. ComRes interviewed 2,057 adults online March 16-18.
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