Chancellor of the Exchequer George Osborne gave to the rich by lowering Britain’s 50 percent top income-tax rate, provoking a backlash as he also took more than 1 billion pounds ($1.6 billion) from pensioners.
Osborne staged a balancing act in yesterday’s annual budget to appease members of his Conservative Party who wanted the top tax rate scrapped to spur enterprise and their Liberal Democrat coalition partners who were demanding help for low and middle-income families. A decision to fund the moves by freezing pensioners’ tax allowances threatened to erupt into a political storm. The opposition Labour Party questioned Osborne’s calculations, saying the rich would benefit most.
While Osborne’s measures may have done enough to win the approval of Liberal Democrat lawmakers, they drew immediate criticism from Labour, which seized on the decision to scrap the 50 percent rate amid polls showing public opposition. Still, taking that step may mean Osborne has defused a potential political time-bomb now rather than waiting for it to become an issue at the next election in 2015.
“There is tremendous opposition to this, but it is better to get this out of the way now,” Bill Jones, a professor of politics at Liverpool Hope University, said in an interview. “It’s quite a big gamble” because “it will be a stick Labour will use right up to 2015 and it will alienate quite a few Lib Dems and Lib Dem voters.”
‘Bash the Rich’
The headline budget measure was Osborne’s decision to lower the top rate of income tax to 45 percent from next year. He told BBC Radio 4 today that attempts to “bash the rich” had failed because the Treasury was losing almost as much from tax evasion as the top rate was generating.
“No chancellor can justify a tax rate that damages our economy and raises next to nothing -- it’s as simple as that,” Osborne told the House of Commons in London in his third budget since becoming chancellor almost two years ago. “Thanks to the other new taxes on the rich I have announced today, we’ll be getting five times more money each and every year from the wealthiest.”
Osborne’s measures amounted to “a reasonable compromise in circumstances where compromises are unavoidable,” Liberal Democrat lawmaker Andrew George said in an e-mail today. “This is a coalition budget. Not a Liberal Democrat one. Of course we would have kept the 50p rate because it conveys the right message, but you can’t flog a moribund horse.”
The pound extended its drop against the dollar today after a report showed U.K. retail sales fell more than economists forecast in February. It was trading at $1.5804 as of 12:30 p.m. in London, down 0.4 percent on the day. The currency ended yesterday little changed. The yield on the benchmark 10-year government bond fell 3 basis points to 2.337 percent today.
The Labour Party questioned Osborne’s use of a study by the tax agency to justify scrapping the 50 percent rate.
That report showed the government would lose 3 billion pounds next year from lowering the levy to 45 percent, while gaining 2.9 billion pounds from people who had previously chosen not to pay the tax now deciding they would.
“That’s a heroic assumption,” said Ed Balls, the Labour lawmaker who shadows Osborne in Parliament. “This is a guess, it’s a gamble and it’s deeply unfair to be cutting the tax bill of the 300,000 wealthiest people by 10,000 pounds a year.”
Osborne said he’d claw back lost revenue with higher taxes on homes bought for 2 million pounds or more, the loss of tax breaks for pensioners and a clampdown on tax evasion by the wealthy.
While Osborne emphasized an increase in stamp duty on the most expensive property purchases to 7 percent from 5 percent, the biggest revenue-raising measure came from the abolition of additional tax-free allowances for pensioners, bringing in 1.25 billion pounds a year for the Treasury by 2017.
The move triggered a backlash in many of Britain’s best-selling newspapers. The Daily Mail said Osborne “Picks the Pockets of Pensioners” on its front page and the Daily Telegraph said the “Granny Tax Hits 5 Million Pensioners.”
“He’s taxing a bunch of people with whom we all have sympathy -- we all hope to grow old -- and who vote, and who are numerous,” Tim Bale, professor of politics at Sussex University, said in an interview. “I’m surprised someone as political as Osborne allowed this through.”
An increase in the bank levy will net the government a further 455 million pounds, while tapping into the reserve that won’t be used to fund the war in Afghanistan once troops return home will give Osborne 1.5 billion pounds a year in 2014-15.
Osborne defended his decision to cut the top tax rate by saying it had flopped as a revenue-generator, encouraged avoidance and repelled entrepreneurs and foreign investors.
The measures will leave people earning 100,000 pounds better off by 40 pounds a year, while the 330,000 people at the very top of the income scale -- earning more than 150,000 pounds -- will be worse off, according to the Treasury. Though their income-tax rate falls to 45 percent, the tax relief they can claim will be capped at 25 percent of their income or 50,000 pounds, whichever is the greater. Together with the increase in stamp duty, they’ll lose an average of 1,300 pounds a year.
The budget was full of measures aimed at pleasing the Liberal Democrats. Osborne toned down moves to restrict access to child-welfare benefits for middle-income earners and increased the threshold for paying income tax by 1,100 pounds to 9,205 pounds from April 2013.
He also sought to stop the practice of avoiding stamp duty by buying homes through a company, imposing a 15 percent tax on such transactions. Currently, the highest stamp-duty rate is 5 percent on properties above 1 million pounds.
Tax on tobacco was increased by the equivalent of 37 pence on a packet of cigarettes, while credits were provided for makers of video games and television films and access to loans for young entrepreneurs improved. Even though oil prices have risen, the fuel duty will rise in August as previously announced.
The budget’s broader economic impact may be more limited.
Osborne said Britain will escape a renewed recession after a contraction in the final three months of 2011, and that the economy will grow by 0.8 percent this year compared with a November estimate of 0.7 percent. Gross domestic product will expand 2 percent in 2013 and unemployment will still peak at 8.7 percent this year, he said.
Osborne lowered the corporation-tax rate to 24 percent starting next month, 1 percentage point further than previously flagged. It will be lopped to 22 percent by 2014. The shift comes a month after President Barack Obama said he wants to cut the equivalent U.S. levy to 28 percent from 35 percent.
The autonomous Office for Budget Responsibility said the budget gap will narrow to 7.6 percent of GDP in the fiscal year beginning next month, still more than France, Germany and Italy. The public debt will peak at 76.3 percent in about 2015, less than previously anticipated, it said.
Osborne was constrained by his desire to retain the U.K.’s AAA credit rating by reducing a deficit now more than 8 percent of gross domestic product and taking measures to support growth that don’t require more borrowing.
Fitch Ratings called the budget “neutral” for Britain’s top ranking in a statement issued after Osborne’s speech.
“The growth story isn’t as bad as it might be,” Bale said. That’s not a bad story to take into an election. In the end, that could be what makes the difference.”