Budget 2012: A big debate about small numbers (cont'd)

 

As expected, this wasn't a Budget about the big picture.

The state of the economy and public finances hasn't changed much since November, and in theory, all the many changes the chancellor announced on Wednesday leave the balance between spending and taxes at the end of this parliament more or less unchanged.

But that assumes, among other things, that Mr Osborne hasn't just given a £3bn tax break to the richest earners.

That is what the reduction in the top rate from 50 pence to 45p would cost the exchequer, if this top 1% of taxpayers did not change their behaviour any way.

But HM Revenue & Customs believes that rich people respond to incentives. Just as they managed to cut their taxable income to avoid this tax, so now the lower rate will encourage some to declare more - meaning that the eventual cost will be just £100m, if that.

The debate about that judgment will continue for some time - not just among the politicians but also economists. The Office for Budget Responsibility thinks it's a reasonable - but prone to enormous uncertainty.

The BBC's Stephanie Flanders explains who is bearing the heaviest burden

In considering the responsiveness of taxpayers in this category, the HMRC has a range of possible estimates.

The OBR has (tentatively) endorsed the most conservative one, which is that top rate taxpayers have a "taxable income elasticity" (TIE) of 0.41. I will get into this a bit later, if I have time.

Suffice to say now that it assumes taxpayers respond quite a lot more than the Treasury originally assumed when the first estimates of the TIE from the 50p rate were drawn up. Then it expected the rise from 40p to 50p to raise £2.6bn. Instead, it has raised £700m.

As I say - all enormously uncertain. There is clearly room to wonder whether the behavioural change will be symmetrical. If you have spent a lot of money setting up a company, for example, to avoid the 50p rate, it's not obvious you will break that up now the rate is 45p. On the other hand, it's plausible that some other money will come back into the system. It really is too soon to say.

What is certain is that millions of basic and higher rate taxpayers people will pay less tax next year as a result of this budget. And that the UK is less than half way through an unprecedented seven-year programme of tax rises and spending cuts that - the chancellor suggested on Wednesday - could involve a further £10bn in welfare cuts from 2014-15.

The debate over the 50p rate may well light up the political landscape for weeks to come. But the picture for the budget and the economy is still pretty bleak.

 
Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this
    0

    Comment number 82.

    Why should pensioners get a better tax allowance than workers? Their biggest problem is interest rates that are held low to support borrowers and banks. Under the labour govt. more and more workers were sucked into the 40% tax rate. Think on; Apr 2010 40% paid on taxable income above £37.4k, 2011 £35.0k, 2012 £34.370k, 2013 £32.245k. These are not rich people?

  • rate this
    0

    Comment number 81.

    In A. Statement, potential output lost because of financial crisis was revised up from 10 to 13% pts compared with pre-crisis trend; a revision that prompted another year of austerity In Budget, output loss was revised down to 11% pts, but no accompanying relaxation in austerity. This seems to have gone unnoticed. Why anyone?

  • rate this
    -1

    Comment number 80.

    Hopefully the change in corporation tax and the 50p rate will keep doers
    in the UK and maybe tempt a few more here. I really don't care if senior
    execs massage their tax bill as long as they open that new factory employing
    2000 people who will all pay Tax and N.I. We need jobs and we need growth.
    If you have to persuade people to come so be it. We have to hope it works...

  • rate this
    0

    Comment number 79.

    18 bn of taxable income moved to last year to avoid the 50p rate. That'd work for only one year, Geo.
    The BIG PICTURE is Make the rich richer and the poor poorer. That is how Geo and the Coalition want the world to be.
    Geo is clever. Like the Cambridge ex-physicist finance theorists who didn't know Black Scholes was only true up to a shock. Thus London was robbed blind by Greenspan & NY banks

  • rate this
    0

    Comment number 78.

    The success of this budget will depend on how effective the government are in closing tax loopholes.

    The tax system is leaking like a sieve so perhaps the same tax accountants who advise clients how to get around the tax system should advise the government on how to close the loopholes down.

 

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