Wednesday, 26 November 2008

Budget summary by Cliff D'Arcy (www.fool.co.uk)


Alistair Darling’s Pre-Budget Report offers short-term gain, but long-term pain. We list the winners and losers from his tax changes.
Chancellor Alistair Darling presented his Pre-Budget Report (PBR) to MPs yesterday afternoon. By cutting taxes and increasing spending, he hopes to avoid a long, deep recession in the UK. However, there is a price to pay in the form of massively increased government borrowing.
Thus, in return for short-term gain, there will be long-term pain in the form of higher taxes and lower spending in the future. Indeed, some economists predict that, as a result of sharply higher government borrowing, our national debt will increase by more than £500 billion by 2015. This is equivalent to an extra mortgage of £20,000 for every household in the UK. Ouch!
So, here’s a round-up of the changes announced yesterday:
Businesses (winners)
In its first three years, my small business saw its tax rate rise from 19% to 20% to 21%. Hence, I welcome the news that the proposed increase to 22% has been put back from 2009 to 2010. Also, some small businesses may benefit from VAT being cut to 15%. In addition, the Government intends to allow businesses to spread their tax bills over longer periods and given them access to a Small Business Finance Scheme offering temporary loans of £1,000 to £1 million.
Foreign dividends paid to medium- and large-sized businesses will become tax exempt with effect from 2009. Also, small firms get temporary relief from empty-property rates: in 2009/10, empty properties with a rateable value under £15,000 will be exempt from business rates.

Families with children (winners)
Child Benefit will rise by 6.4% from £18.80 to £20 a week for the first child and by 4.9% from £12.55 to £13.20 for other children. These changes have been brought forward three months, from April to January, as have proposed increases in Child Tax Credit and Working Tax Credit.

High earners (long-term losers) and other workers (winners)
After eleven years of restraint, the Government has taken aim at Britain’s richest individuals. From April 2011, it will introduce a 45% income-tax rate for those earning over £150,000. It estimates that only 400,000 people will be affected by this tax hike -- the richest 1% of the population. What's more, from 2010, the personal allowance for income tax (currently £6,035) will be withdrawn completely for the highest earners. Those earning more than £140,000 a year will lose their entire personal allowance, while those on £100,000 to £140,000 will lose half of its value.
On the other hand, the temporary £120 tax rebate for basic-rate taxpayers will become permanent, increasing to £145 next April. This will put more money in the pockets of around 22 million households. Alas, from April 2011, National Insurance contributions are to rise by 0.5% for both employers and employees. Also, the lower threshold for NICs will be raised to match that for income tax. In effect, future NICs will rise for anyone earning over £20,000 a year.

Homeowners (not much on offer)
There’s not much on offer for homeowners, although the Chancellor has promised that borrowers in arrears will be given a three-month breather before lenders can begin repossession proceedings. In particular, hoped-for reforms to Stamp Duty Land Tax failed to arrive, with no extension to the current one-year exemption for houses worth up to £175,000.

Motorists (losers)
Vehicle Excise Duty (VED, alias ‘road tax’) will increase and will be based on CO2 emissions. However, the maximum increase per vehicle will be capped at £5 in 2009 and £30 in 2010. The greenest vehicles will have their VED cut by up to £30. Fuel duty is to rise by 2p a litre from 1 December and by a further 1.84p a litre from 1 April 2009.

Pensioners (winners)
Pensioners do pretty well from the PBR. From April, the Pension Credit rises by £6 to £130 a week for individuals and by £9 to £198 a week for couples. Also, the weekly state pension for a single person is set to rise by £4.55 to £95.25 in 2009/10. The Winter Fuel Payment remains at £250 for the under-80s and £400 for the over-80s, plus there’s an extra one-off bung of £60 in January (£120 for couples).

Savers (no change)
There’s precious little on offer for savers in the PBR. However, the government is to launch a national savings scheme in 2010 aimed at eight million people who receive various state benefits and tax credits. The Savings Gateway scheme was first proposed seven years ago and has been undergoing trials in selected parts of the UK.
A Savings Gateway account can be held for two years, with the Government adding 50p to every pound saved, which is a terrific return for low-income households. In total, up to £600 can be saved, with the Government contribution capped at £300. However, families earning less than £15,000 a year and individuals earning less than £11,000 a year are unlikely to have much disposable income, which may handicap this scheme. In addition, this scheme could be open to abuse, with well-off relatives or friends providing savings to low-income folk in return for a cut of that guaranteed 50%+ return!

Spenders (winners)
People who like to splash their cash will be pleased to hear that Value Added Tax (VAT) is being cut from 17.5% to 15% until the end of 2009. Then again, housing, food, childcare, public transport and children's clothes are already VAT-exempt, so these will not become any cheaper. Indeed, some retailers may decide that the switch to 15% VAT is too much hassle and, instead, will absorb the extra profit. It’s bad news for sin taxes, too, as duty on alcohol and tobacco will be increased to cancel out the VAT cut.

In summary
This is a big-budget giveaway, designed to put more money into everyone’s pockets in an effort to prevent a major downturn in the UK economy. Thanks to changes to income tax and NICs, most households will pay between £119 and £343 less tax in the 2009/10 tax year. Thus, most workers will be winners, although high earners will lose out in future. Indeed, someone earning £200,000 a year will pay almost £5,600 more tax and NICs from 2011/12. However, I suspect that few of us will take pity on these super-high earners!

3 comments:

Tony Sharp said...

Hello David - I hope all is well with you and the family.

The information above suggests "Also, some small businesses may benefit from VAT being cut to 15%."

I wish it was true for the real small businesses. As I point out on my blog, those entrepreneurs on Flat Rate VAT are going to pay more. Once again Labour is using business as a cash cow when it can least afford it.

Best wishes my old friend!

Tony

Anonymous said...

Since the day Henry VIII privatised land belonging to the Church (until then all land was state owned) there has been a fourteen year economic cycle, as regular as clockwork. Between these cycles, a 7 year little recession.

Yes, the government has taken a great gamble, they admit it, and yes, like any gamble, it may be a losing throw of the dice.

We could do nothing. Doing nothing is always an option.

Following the Wall Street Crash, the decision was taken to do nothing. Stocks crashed, savings were lost, wages were slashed, jobs lost. Every time someone lost their job, wages were cut, there was less money being spent, fewer goods being purchased, more jobs were lost, and so the economy spiraled down out of control.

Lessons have been learnt since then or at least have been learnt by some.

What got us out of the Great Depression that followed the Wall Street Crash was the Second World War, or in other words, massive government spending. It is only this generation that has finally paid off the debt incurred.

From a macro-economic point of view, it does not matter how the money is injected into the economy, it can be government waste. Keynes suggested paying men to dig holes, paying men to fill them in. The men would then have money to spend.

We missed out on our seven year mini-recession, and that was what led Brown to claim an end to boom and bust. The reason was very simple, Brown encouraged massive consumer spending, massive consumer debt, and that is why we are where we are today.

The amount that has been injected into the economy may not be enough. There is a strong possibility it is too little, too late. It has also not been spent wisely.

If we look before the 1950s, investment was real investment, it went to create wealth. Now it goes to fuel consumer spending.

The French were right to criticism the British for cutting VAT. It was consumer spending and easy credit that got us into this mess. Have no lessons been learnt?

All of the money should have been injected to help the poorest of the poor. Those on benefits, pensioners, people who have no disposable income left at the end of the week. All their money goes on food and fuel, sectors that have seen inflation of at least three times the official inflation figure.

If you are made unemployed, you will not get your mortgage paid for at least nine months, in the meantime your house will have been repossessed by the bank, further depressing the housing market and yet another household to be rehoused by the local council. Mortgage repayment should start from the day you are made unemployed. Their would be a time limit for those in mansions.

Brown can find money to hand out to everyone but the poor. It was not many months ago when he said it was a gimmick to give the poor money to counter rising fuel bills.

Money given to the poor goes straight back into the economy. It is also spent in the local economy and thus gets recycled.

Money should also have gone into capital projects. Not large capital projects which benefit the few and have long lead in times, but small scale, rapid implementation. For example community owned wind turbines that supply electricity to a community owned grid (the surplus goes to the national grid). Rooftop solar energy. Home insulation.

All these projects benefit the local community, provide employment in the local community, retain and recycle money in the local community.

We are told there is a worldwide banking crisis, not true, though almost true.

Grameen Bank in Bangladesh has not been effected by the banking crisis.

The beginnings of the Grameen Bank were in the 1970s. $27 was lent to 42 rural poor, with no collateral. Grameen Bank is now a multi-billion dollar enterprise, has lent to over five million people, has a debt repayment success of over 98%. This to poor people with no collateral.

Grameen Bank lends for small business ideas, for home improvement, for education. It even lends to beggars, who are known as 'struggling members'.

The money is not lent for consumer spending.

The Bank is 95% owned by its poor members.

The Grameen Bank is now a group of companies, which includes the largest mobile phone network in Bangladesh.

Anonymous said...

A cut in VAT encourages consumerism. It was rampant consumerism riding on a mountain of debt that got us into this mess in the first place.

We only have one planet.

Buying cheap tat that is on a one way trip from a Chinese sweatshop to a landfill site is of no benefit to anyone.

The investment should have gone into wealth creation, a Green New Deal.

A community owned wind turbine generates local income.

Rooftop solar power generates local income.

Home insulation creates a disposable income.

The Climate Crisis is far bigger than the Economic Crisis.

Rushmoor has twenty million pounds of our money, less the two million the incompetent fools lost in Iceland, in its coffers. Half of this money should be invested in local small businesses to help kick start the local economy.