UK Budget falls short of tax-reforming boast

21st March 2012

The measures announced are disappointing relative to the billing as a tax-reforming Budget that will lift growth.

A tax-reforming Budget would have slashed marginal rates for the majority of tax-payers to boost incentives to work, save and invest. The rise in the personal allowance is welcome but cuts the marginal rates of no more than 7% of taxpayers (i.e. two million out of 30 million). The offsetting reduction in the basic rate limit, moreover, implies that more earners will be drawn into the 40% band. The cut in the top rate to 45%, meanwhile, affects only 300,000.

A tax-reforming Budget would also have tackled unwelcome humps in marginal rates associated with plans to withdraw child benefit from higher-rate taxpayers and the withdrawal of the personal allowance above £100,000.

The main growth-boosting measure is a faster cut in corporation tax to 22% by 2014-15 but the change is marginal and unlikely to have a major impact on business confidence and investment.

Within the details, there is a large element of robbing Peter to pay Peter. The cost of the corporation tax cut, for example, is exceeded by increases in other business revenues, stemming from a higher bank levy, changes to North Sea taxation and controlled foreign company rules. The rise in the personal allowance, meanwhile, is partly paid for by freezing age-related allowances and extending VAT.

The OBR's fiscal forecasts are little changed from November but its assessment that the Chancellor is on track to meet his targets assumes that plans to step up spending restraint will be achieved. Government actions cut the deficit by £41 billion in 2010-11 and 2011-12 combined, split between £23 billion of expenditure reductions and £18 billion of tax hikes (Budget table 1.2). A further £41 billion adjustment is planned for the next two years but with spending cuts bearing much more of the burden – £34 billion versus tax rises of only £7 billion.

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More Budget coverage from Mindful Money:

Budget 2012 LIVE: What's in George Osborne's briefcase?

Mindful Money's pre-budget round-up

Mindful Money's top 10 Budgets

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