The 2010 budget

22 June 2010
I don't normally pay much attention to budgets, but this one was billed to have major changes compared to other recent ones. The previous government deficit-spent at the height of a boom, and with debt interests payments now as big as the defence budget, unpopular choices were to be expected. VAT going up is a pain, but from my perspective it is the lesser of various evils. Otherwise pretty neutral as far as tax goes. On the cuts side, the budget has only covered benefits which do not affect me, and I expect more to come out regarding cuts at a later date.

VAT increase

The headline change is upping of VAT to 20% from the new year, and this was widely predicted. With just about every other revenue source that accounts for more than 5% being cut or frozen, it was inevitable as it is more efficient to raise a large tax than a small one. Although criticised for affecting poorer families the most, this criticism tends to disregard the zero-rating of bare essentials such as unprocessed food. The lack of any product up-rating is clearly designed to avoid a lot of the sting.

Capital Gains tax

Pretty much had to go up if there was to be any balancing of the pain towards the wealthy, as virtually no-one who makes big money actually pays via income tax (now guess why Labour's new 50% top rate of income tax not abolished). Personally I think David Davis' idea of making the CGT rate lower the longer the asset is held was quite good as it rewards long-term ownership over fast speculative buy-sell, but instead they opted for a new higher CGT rate. Not sure who qualifies for the Entrepreneur 10% rate, but its sharp increase from £2m to £5m is certainly interesting.

Income tax allowance

Increasing the income tax allowance by £1,000 will make anyone who works full-time better off, although those on graduate salaries might not really notice the extra £200 (not sure why the BBC is reporting it as £170). In either case, a welcome change.

This does not benefit seriously low paid part-timers though. The old £6,475 income tax threshold, assuming minimum wage (£5.80 for over-21s) and 250 working days per year (52*5 minus bank holidays, rounded to multiple of 5), is 22 hours (roughly 2.5 full work days) per week. Getting maximum benefit from the increased allowance requires 25 hours per week.

Company tax

If there is to be a shift away from public sector dependency, then reduction of company overheads is required. Exemption of start-ups from National Insurance, and a larger decrease in company taxes for existing smaller companies. Small companies tend to get a raw deal, so on the whole this is a good move.

Lots of public sector jobs are going to get the chop, and having incentives for new businesses in such areas is clearly based on memories of the brutality of Thatcher-era industrial closures. Although not stated I think it is also intended to reverse the over-concentration of private-sector GDP in and around London, and hence reduce the strain on the infrastructure in the area. I suspect that it'll tend to benefit the south-west rather than northern England.

Benefit cuts

The budget seems to have hit child-related and housing benefits very hard. Now too surprising as these are major expenditures, and anything major is not going to escape cuts. One generalisation that seems clear is that the state is no longer willing to subsidise couples having large families, which is particularly noticeable with housing benefit capped at 3 bedrooms. I suspect the cutting of health in pregnancy is part of a move to consolidate many small benefits into fewer but larger benefits.

Other details

Bank levy: All things considered this does not seem to expect to raise much, so I expect it has as much to do with PR than (near-future) revenue generation. Not sure why exemption is based on size rather than amount of government bailout cash received.
Flight tax changes: Devil is in the detail. On the plus side a flat per-flight tax means tax paperwork does not need any cross-referencing with passenger manifests (saves on administration, especially auditing), and generally encourages fewer flights with large planes (larger planes have better per-passenger fuel burns)
Rural fuel duty discount idea: Nice idea, but not sure how it would be allocated in practice. If it is based on petrol station location all but inner-Londoners will drive into the counties to refuel, and if it is based on home location you will have people like me (i.e. have both rural and city addresses) claiming the rural rate even when using inner-city petrol stations. As soon as a scheme does things like checking that claims are for rural petrol stations near the owner's rural address, you require yet another army of administrators. And that is the last thing the government needs.
Cider duty rise scrapped: Was seen as rather punitive, and its proposal likely contributed to Labour's decimation in the south-west. Alcohol pricing is more to do with social policy than raising revenue anyway, so it is being reviewed separately.
Video game company tax breaks: Not sure about the removal of tax breaks for video game companies. It is a big growth area, but I can see why the government does not want to give tax breaks to an industry it thinks can survive without them.
Growth forecasts: The previous government's growth forecasts were somewhere between wishful thinking and fiction, so hardly surprised lower forecasts were used.
Pension re-linking with earnings: Some good news on pensions had to be included. This is mindful both of the Thatcher-era legacy of de-linking of pensions, and of the equally bad feeling of brown's strictly inflationary rise.
Council tax freeze: Bad idea. Much as I hate council tax, setting of rates is not an area of business for central government.