The 2012 Budget

Today was the day of the 2012 budget announcement by the UK Chancellor of the Exchequer George "Gideon" Osbourne and even though I mostly blog about Jersey politics I wanted to take a moment to write something short(ish) on what is happening because it is important to think about progressive economics in a broader sense to understand how to go about managing other economies. Also the Jersey government is one that is on the same ideological wavelength as the UK government (i.e. very right wing) so it's good to be able to analyse that frame of mind and scrutinise it to help win those arguments in Jersey too.

I won't lay out in detail exactly what was in the budget, but that can all be found here - http://www.bbc.co.uk/news/uk-politics-17449501

The most important and contentious issue was always going to be what happened to the top rate of income tax. Now, obviously as a socialist I am quite philosophically keen on the idea of the rich paying more in taxes to relieve the burden on the poorest and fund the welfare state etc, but obviously pragmatism has to win the day and what actually works should be the option to go with.

The argument by the government is that the tax was damaging to Britains competitiveness, barely raised any income and was a disincentive for businesses. So lets tackle these points one by one.

Firstly, the tax is damaging to Britain's competitiveness. In a couple of months Francois Hollande of the French Parti Socialiste is going to win the French Presidency and has said that he will introduce a new top rate of income tax of 75%. With this in mind, Britain has nothing to worry about.

Secondly, the tax barely raised any income. Well, HMRC disagrees (http://www.hmrc.gov.uk/stats/income_tax/table2-5.pdf) their estimate is that it raises £6.7 billion. Maybe to the likes of the Etonians £6.7 billion is not very much, but I think that it's a very significant amount that is worth collecting. But lets say that the estimate was much lower and it turned out not to raise that much tax, surely the fact it collects something rather than nothing is a reason to do it anyway? It would only be worth abolishing if it actually meant we collected less taxation. But the important thing to note here, is that if that was true, the logic would surely follow that the 50p tax rate should be abolished altogether then, but instead it has simply been lowered, which just reveals that not even the government believes their own spin and are acknowledging that it does in fact raise money that is worth keeping. But hey, they have to please the party donors somehow right?

And the third point, it is a disincentive for business. How ridiculous do they need to be?

The government seems to be totally confused on this issue. Firstly, I just refuse to buy this point that the 50p tax is a disincentive for people to invest in business. Surely, because your income has gone down through tax, you would be more keen to invest to get a higher profit return to make up for that lost cash? It doesn't make sense.

What is a great way to incentive business, is to lower corporation tax (which is admittedly what they have done, and I support it). Because the corporation tax is lower than the income tax rate, and so a businessman knows that if he takes money out in dividends or wages or whatever he will pay a much larger proportion of it in tax than if he keeps it in the business. Getting businessmen to keep more money in the business and growing it is a lot more desirable than wanting them to take it out as income and spend it in the casino in Monaco. This will help the businesses expand and thus employ more people which will be good for the economy.

But whilst lowering corporation tax is a good thing to do, it is simply idiotic to do it at the same time as also lowering income tax, because that is less of an incentive to keep the cash in the business! They should have only lowered corporation tax.

Some will say that there were a few good things in the budget that I should be happy about, and there were some things that in any other circumstance I would be, but my position changes when the top rate of tax is also brought down because of the effect that has.

For example, I should be happy that the personal tax allowance has been raised. Well I am. But lets not pretend that this lowering of tax for poor people has balanced out the lowering of tax for rich people, because the thing no commentators seem to be saying today is that the personal tax allowance affects the rich too. So today they have effectively had 3 tax cuts, whilst the poorest have only had one (which is countered by the savage cuts to their services they're also getting).

Another thing that makes no sense is the Chancellors logic that lowering the 50p rate will encourage the richest to stop avoiding paying tax (this is nonsense in itself, because they won't rearrange their affairs to pay more tax just because the rate is lowered, they'll just pocket the difference instead) yet he also announced new measures to tackle tax avoidance... So why bother with encouraging them to stop avoiding if you are going to make them unable to avoid it in the first place? He either has no faith in his own measures, or he is using it as a smokescreen to let his pals get away with a bit less taxation.

This, ladies and gentleman, is typical Conservatism. Looking out for the richest, whilst the poorest pay.

If I had been the Chancellor, today I would have announced a cut in VAT, raised the personal tax allowance and repeated the bankers bonus tax. But most importantly, I would have laid off the austerity. As Keynes noted after the Great Depression, you can't get out of a recession by cutting public spending, you have to increase it to get investment going and jobs being created. Adam Smiths "invisible hand" doesn't exist and we need a strong government to interfere in the economy to sort it out when crisis hits, not resolve themselves for any responsibility like this government is doing.

Yes, this means increasing the deficit and increasing debt, but both of those are much better sorted in an economy which is growing and unemployment is falling. We currently have the opposite and the economically illiterate policies of this government are going to make it worse.

This is the attitude Britain needs, it's the attitude Jersey needs and it's the attitude the world needs.


Next blog will be more directly about Jersey politics! I promise!

Sam