The missed opportunities of George Osborne’s budget

The missed opportunities of George Osborne’s budget
Rory Meakin  •  2020 Tax Commission  •  Friday 25 March 2011

George Osborne delivered some good news in Wednesday’s Budget. He stated the Government’s intention to simplify taxes, introduced surprise 1p cuts in both Corporation Tax and Fuel Duty and he reaffirmed the Government’s commitment to macroeconomic stability and the fiscal policy tightening programme outlined in the June Emergency Budget. Reviews into the treatment of profits of ‘Controlled Foreign Companies’ and a promised shake up of Britain’s enterprise-asphyxiating planning system also offer a basis for some optimism. But despite these measures and their accompanying nasty surprises (see our post budget briefing), the overriding impression was that it was a budget of missed opportunities.

Cutting Corporation Tax by 2 per cent instead of the planned 1 per cent from April was a surprise, but it was not enough. OECD data shows 10 out of its 28 members already have rates at 24 per cent or lower. Cutting our rate to 26 per cent will not do enough to tempt business to Britain or encourage new start-ups and growth of indigenous companies. The Chancellor should have cut it more aggressively.

Missing opportunities...

Likewise, sticking to the already announced plan to raise the Personal Allowance by £1,000 (to £7,475) will help but it’s not nearly enough. People on low incomes and those on benefits with the prospect of a job with relatively low pay are heavily disincentivised by both taxation and benefit withdrawal from making the most of available opportunities. As we’ve pointed out, £10,000 by the end of the Parliament is not the same and will be worth much less than the pledge in the Liberal Democrat manifesto.  For the sake of both reducing the welfare bill and the lives of those on low incomes, the Government should move more quickly.

On the 50p top rate of income tax, ordering an investigation into how much it actually raises is a good idea but we already have a good idea of the answer. The evidence is already overwhelming: independent forecasters expect the measure to raise negligible amounts or lose significant amounts of money. The fragile recovery and the pressing need to close the budget deficit both mean the Government should have abolished the 50p rate immediately.

Finally, George Osborne was not bold enough on tax simplification. We welcome the move to hold a review into reform of Income Tax and National Insurance, but George Osborne should not have said he does not plan to abolish the contributory principle. It is already close to meaningless in light of the proposed pension reforms and the Government should do the humane thing and kill it off once and for all. It is hard to see how any serious simplification of the system could be implemented without doing so.  In terms of the immediate proposals in the Budget, as I pointed out in the TPA briefing document, there was as much complication as there was simplification.

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