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

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Comments

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  • rate this
    +2

    Comment number 1.

    There is ample pain but no gain and no guarantee the thing that GO is obsessed with - the deficit will be any better by 2015/16. Talk of an extra 10 Bn PE cuts confirms that the basic strategy is taking down the welfare state not advancing the economy and the Lib Dems continue to hang on the Tory coat tails because they have no where else to go.

  • rate this
    -2

    Comment number 2.

    "But the picture for the budget and the economy is still pretty bleak."

    Despite the massive cuts, we still have a little growth and increased exports, while the rest of Europe is going into recession. Unemployment is falling and the deficit is falling faster than expected.

    Not quite as bleak as it was a couple of years ago when they came to power, and the country was on the verge of collapse.

  • rate this
    0

    Comment number 3.

    Was expecting more from the coalition. But no radical ideas, no change of the status quo.
    Income is taxed while wealth is not taxed. House prices have risen since 90s and government ignoring this income.
    Just add LVT for person with more than one property (only 2nd/3rd properties taxed).
    But no, youth/tenants and savers are punished. Reckless continue making profit out of us ( thanks to BOE)

  • rate this
    +8

    Comment number 4.

    With the price of oil set to hit 160 US dollars a barrel soon, this budget will quickly become irrelevant.

  • rate this
    +5

    Comment number 5.

    As I go about the country, I see plenty of anecdotal evidence that the economy is reviving. I think the ONS has missed a point of inflexion just as they did several years ago when the downturn started. Watch this space. Unemployment stops rising. Actual growth for 2012 twice estimate. The budget will support this growth. Now heap coals on me for stepping out of line.

 

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