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Is it a soak-the-rich Budget?

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Stephanie Flanders | 13:19 UK time, Wednesday, 22 April 2009

We don't have all the numbers yet, but two key messages from today's Budget. One is that the chancellor is betting on a very rapid bounce-back of the economy to make his numbers add up.

It's quite common to have rapid growth after a recession - in that sense 3.5% from 2011 onwards is possible. But this isn't a typical recession. All the evidence is that recoveries are much weaker after recessions that start with a financial crisis, and this will be after, arguably, the greatest financial crisis we have ever seen.

The other, political, message is that he is going to balance the books on the backs of the rich if he gets half a chance. We haven't got the Red Book yet with all the details, but my guess is that the Budget tightening of 0.8% a year from 2010 will put him in the right ballpark for stabilising the debt ratio by 2015-16 - although at a whopping 79%, compared to the 57% peak in 2013-14 forecast in November.

The speech gives the impression that he's going to raise most of this from the rich - something which the Institute of Fiscal Studies earlier this week said could be very hard to achieve.

But more than usual, the fine print matters. Last November he talked big about tax rises on the rich, but the bulk of the tightening he announced was actually raised through slower growth in spending, which affects everyone, perhaps most of all the poor. We still don't know what that balance will turn out to be. It's not a soak-the-rich Budget until we see the numbers, but it certainly sounds like that from here.

Comments

  • Comment number 1.

    But the real kicker is not that people on over 150k will pay 50 % tax, it is that having broken a manifesto commitment, what guarantee can they give that next year it wouldn't be 60% on people earning 100k...

    They are finished.

  • Comment number 2.

    These rich people...they'll be labour donors then?

  • Comment number 3.

    Every bloody budget under a Labour government gets this question.

  • Comment number 4.

    I don't think it sounds like the rich are even going to notice the budget. Anyone who suffers more tax as a result of the higher rate increase is either incredibly bad at tax efficient distribution of income or working in the public sector and looking forward to a final salary pension. Meanwhile the rest of us pay more tax to get around and more tax going out. In particular, it seems those of us who rent houses rather than owning one (And will continue to do so now you can't get a mortgage anymore) are subsidising all the people who borrowed more than they could afford to buy a house. Having a kid and living off benefits is looking more attractive than ever.

  • Comment number 5.

    Stephanie,
    It seems you accept that the only possible logic behind a growth forecast of 3.5% after a recession is one based on recoveries from previous recessionary events, yet state that however "this isn't a typical recession...... and this (recovery) will be after, arguably, the greatest financial crisis we have ever seen."
    I cannot see any basis for ANY kind of a growth forecast apart from past performance. Aren't we always warned not to base future performance on past results?
    Anyone see any growth industries out there??? I can see one: administration of Job Seekers Allowance.
    Thought not.

  • Comment number 6.

    I vote for Stephanie as Chancellor.

  • Comment number 7.

    Hang on. At £150k even at 50% tax you still take home £4,800 a month or £240 per working day.

    Given that people that really contribute to society don't earn anywhere near these levels of income just how bad is it to expect someone to live on £4,800 cash take home per month.

    Yes, Brown may have broken a pre election promise but hey - tough times call for tough measures that include helping people through, not cutting them loose as the Tories would love to do to help their buddies in the City and big business.

  • Comment number 8.

    I don't think the 50% tax will 'soak the rich'. It's nothing but brazen tokenism, designed to please the Left of the Labour Party and show that he is doing 'something' to bash the rich - even if the ultimate result will be minimal. Only 1% of earners will be affected by the extra tax, and many of those will find manifold ways to avoid it. If the Chancellor had been serious about raising extra revenue he would have started the extra rate at £100k instead, and brutally closed down all tax loopholes that are available to the wealthy. At the end of the day the rich Labour donors will hardly be affected as they will still pay little or nothing through their offshore structures, while the rest of us suffer - as usual.

  • Comment number 9.

    First of all how will this raise as only a small percentage of people earn over £150,000, in my opinion if this is a serious revenue earner it should be more like £75,000

  • Comment number 10.

    I earn over 150K a year and I don't think the increased top rate is unfair.

  • Comment number 11.

    The really wealthy will just go elsewhere to live, leaving the poor Joes earning around about the £150,000 mark feeling the burdon. The others having left means that the street walker won't get the kind of money he imagines.

  • Comment number 12.

    The 50% rate doesn't mean you lose 50% of everything - just 50% of all above 150k.
    So monthly take home is actually £7,900.

    A monthly take home of £4800 is what you get from a salary of about £85k.

  • Comment number 13.

    And the pound's on the slide.....

    Sterling is falling, as all the rich folk sell their British assets and take the next private jet out of the country....

    Then again, maybe it's the 3.5% growth forecast that scared the horses.

    Anyway, I've got a bet on the pound falling to 1.11 or less against the euro. It's good to hedge, just in case....

  • Comment number 14.

    It is well known that those in the high earning brackets do not contribute much tax at all as they prefer to pay financial advisers instead so they can avoid paying as much tax as possible. All that happens is they may pay more fees on tax advise which is ultimately about tax avoidance.

  • Comment number 15.

    The usual Labour easy headline of 'tax the rich'. And how much is this supposed to raise, bearing in mind the massive level of debt Brown/Darling have built up? It won't amount to even a drop in the ocean, as an anywhere half competent accountant will find a way to avoid paying the extra tax.

  • Comment number 16.

    A 50% upper tax rate just sends a bad message. It's a lazy measure to take when the real money could be gathered by closing off-shore and non-dom tax loopholes, or a tax on short selling and similar dangerous speculation.

  • Comment number 17.

    I just wish people wouldn't go along with 'to please their friends in the city' - whether Labour or Tory.

    How many voters are in the City - 50,000?
    How many voters are their in the country 50,000,000

    Who has the bigger say?

  • Comment number 18.

    Er Bitty... the takehome pay on a salary of £150k is £7900 per month. This is unchanged by the budget. It's only income above £150k that'll be taxed at 50%. So your argument is stronger.

    On the budget, unfounded optimism is unusual for the governing party. Let's hope they get this right.

  • Comment number 19.

    Considering what a totally silly idea the VAT cut was, the reality it seems to me and the one avoided today and left for an incoming Tory Government goes as follows:

    Leave the top tax rate at 40% - it makes sense because it aligns with IHT and Capital Gains Taxes.

    Raise the Tax a NI Thresholds substantially and increase the basic rate of Income Tax by - whatever necessary.

    Restore VAT to 17.5% immediately and accept that it will have to rise in stages to a peak of around 20% over the next 4 years.

    All of this with genuine reductions in the size of the State and very harsh remedial action on State Sector Final Salary schemes.

    This was clearly a "Political Budget" in the sense that Labour accept that the Tories will win the next election so they have left all the hard choices to them. The reason obviously being that they hope that as Cameron tackles the economy and becomes unpopular, it will leave room for a quick comeback by Labour.

    However that won't work because Brown will do a "McCavity" post the election defeat and Labour will not have anybody to lead them effectively for at least a decade or more.

  • Comment number 20.

    Stephanie:

    "Is it a soak-the-rich Budget?"

    Not really it is really a soak the investors and savers budget. Savers and investors have seen massive reduction in returns (up to 90% in some cases) and NOTHING is being done to redress this injustice.

    Indeed as these are the very people that are need to fund the catastrophically high borrowing this is daft. The estimates of borrowing rely on a totally incredible recovery in 2011 (see the Red book). (After the next election!) In the meantime savers and investors who are critically vital to the funding of this requirement are being punished like never before - this is the economics of the madhouse.

  • Comment number 21.

    Hi Stephanie

    Is it a soak the rich budget? Probably not as they usually find ways of getting around it. The sad part is that we are ignoring the evidence of the laffer curve which was a lesson we appeared to have learnt in the late 1970s and early 1980s.

    We may end up with the "rich" paying less tax as they put more effort into avoiding it. So bizarrely the poor may end up paying more rather than less as you hint at......

    So a budget which is likely to fail in its own terms which is left with a few attempts at political points scoring.

    Very poor.

  • Comment number 22.

    The tax on hike on £150K+ earners demonstrates the same naivete the FSA & Treasury demonstrated around off-balance sheet SIVs. Many Earners in this range will be able to structure their earnings to mitigate their exposure. In my experience the UK has some of the most lax tax legislation in the OECD. Off-shore holding companies, trusts, minority interests in family held investment vehicles etc - the permutations are endless & most of the UK's HNW individuals exploit these provisions to the maximum extent of the law. Revenue from this stream will fall a long way below the treasury's expectations.

  • Comment number 23.

    Not so much a budget statement as a decorative wallpapering session !

    All the emphasis was on high falutin' sentiment and social principles, and very little on how the UK is to adapt responsibly to the our, and the world's financial crisis.

    And what responsible action was suggested for NOW, 2009/10 ? Er..... nothing at all, apart from the bog-standard increases in booze, fags and fuel !

    As is par for the course for this administration, they haven't the political will nor the integrity to take responsible action on the taxation front before the next election.

    Neroes Brown and Darling prefer to fiddle while borrowing goes through the roof, and we are all consumed in the subsequent financial conflagration.

  • Comment number 24.

    There is an awful lot of nonsense spoken about taxing the 'rich' or punishing them. First of all, when did earning £150,000 per annum make you rich and secondly, do we want to live in a society that punishes success.
    The second point is perhaps most pertinent. If one decides to get oneself educated, develop a skillset and work hard in applying to a chosen career, why should they be punished? Why should they be punished for having ambition and drive? Whay should they pay for people who decided not to get themselves educated and who haven't shown the ambition or drive to be successful? Whay should they pay for people to sit at home having babies, expecteing someone else to pick up the bill?
    It is important to remember that the economy would grind to a complete halt if there weren't people earning money and contributing it to the economy. I would much rather contribute my earnings to the economy than some bottomless pit of public sector spending.
    The Labour government came to power with a free market approach, have destroyed the economy and are now reverting to 1970s style, socialist taxation.

  • Comment number 25.

    Stephanie....What happens if Alistair (Rabbit caught in the headlights) Darling is incorrect about recovery date ? It would seem to me our economy is pretty much going down the plughole! No manufacturing industry to speak of to support it, the financial service sector rapidly disappearing in a 'high tax' environment, very few natural resources available........My advice to any young couple would be to get out and get out now!

  • Comment number 26.

    Nothing new under Labour, tax hard working people and reward the slackers doing 9 to 5. Comical Ali strikes again...

  • Comment number 27.

    Did they manage to tax Fred Goodwin's pension, by any chance?

    Oh no, sorry, he's a very important wealth creator. We can't do that,
    we'd be biting the hand that feeds us.

    Money = real value? Given the story of the housing market, No.

    The law of supply and demand is not a natural law like the laws of thermodynamics.

    Voters need to be educated about these things, so that they don't force politicians into pointless crowd pleasing decisions.

  • Comment number 28.

    The growth predictions are more than optimistic, they're downright fraudulent. There is simply no way that growth will be be over 1% next year and over 3% in 2011. And the trend rate of growth has been increased to 2.75% without any justification whatsoever. Fiddling the growth figures was the only way the numbers could add up. But we won't be fooled. We know debt is going to hit £1 trillion. And it will be 1 trillion years before Labour is let near the economy again.

  • Comment number 29.

    recessionjunkie (#24) "If one decides to get oneself educated, develop a skillset and work hard in applying to a chosen career, why should they be punished? Why should they be punished for having ambition and drive? Whay should they pay for people who decided not to get themselves educated and who haven't shown the ambition or drive to be successful?"

    There are a lot of IF's there.

    Here's something to rock your boat justa mite:

    The evidence now strongly suggests that drive and educability are largely genetic. So, those who don't have the right genes, don't get the 'choice'. You could ask why people who are lucky in the heritability stakes are to be rewarded financially. Should highly attractive people be paid for phenotypes they have no choice over? Should we reward peole for things which require no effort etc?

    To be clear, the evidence is that ability is a good predictor of economic success, and that genes drive ability (and inability).

    So assertions like yours strike me as hubristic, self-centred and really quite venal.

  • Comment number 30.

    TOPSY-TURVY

    bravenewflabby (#27)

    "Voters need to be educated about these things, so that they don't force politicians into pointless crowd pleasing decisions."

    Agreed, but who's going to do that now? Who is prepared to do as they are told? Are you? We now send half the population to 'university' (instead of 5% as we did in the 60s so they think they know it all when in fact they've lost sound peer referencing - now why DID New Labour and the Conservatives both do that?). We've kissed goodbye to deference, respect and elitism all in a mistaken belief in equality - and we actually now have no real choice between political parties as they are all the same or is that 'equal'?.... oh, and anything authoritative is deemed 'nanny' or 'nazi'!

    Who really listens to the ?

  • Comment number 31.

    So OK, Let's say I earn 180k for sake of argument, due no doubt to a combination of genetic advantage, skill, hard work and a fat dollup of dumb luck...

    Now let's say I want a pension to live off in my later years. I'm not talking a silly Goodwin-esque pension. Maybe £40 or £50k a year. A fair pile of cash, enough to live comfortably, feel I can do what I want, take nice holidays, treat the grandchildren etc.

    Well given annuity rates are perhaps 5% at best, I need to put around £800k - £1m into a pot to provide this income.

    So say I work in gainful employment for 30 years (who knows these days if I will have a job next week let alone next year) I would have to put an average of £25 - 35k a year into the pot a huge amount from my income, given my other living expenses and given that I have had to work for years (contributing far less) to reach my current income. So now 20% of my contributions have been pinched so I now need to be in uninterrupted employment for 38 years to get to the same place.

    So let's say I am lucky enough to be employed for such an extended period on such a good salary and prudent enough to put the required cash into the pot and that some pension fund manager does not gamble the pot and lose it, then I start drawing my £40k per annum pension. The question I have Stephanie, is do they then tax me on this pension income all over again? No doubt, the chancellor would see this income as taxable and I would be hit at 20% - i.e. taxed twice?

    The idea used to be that pensions were taxed as drawn rather than as contributions were made, but now I will pay the higher 30% tax increment as contributions are made and then the 20% (or 20% and 40%) tax as drawn, so even if my ultimate pension is below the 40% tax rate, it is still in effect taxed at 30% as contributed plus 20% as drawn. Clearly the thing to do is to find a job with a lower wage, but a nice final salary pension and then only get taxed on my pension once rather than twice - maybe there's something going in the public sector...

  • Comment number 32.

    SenorChevalier, Recessionjunkie, and others

    I agree that this talk of 'punish the rich' is regrettable, and I disapprove of the attitude. But in these times everyone is going to suffer, and the question is how to spread the suffering fairly? Its clear that those earning over 100k are still going to have a pretty good standard of living.

    Your gripes are more about (1) driving people towards achieving more, and (2) why should the hard work of the high earners subsidise the welfare addicts. The first gripe is a pragmatic one, the second is a moral one.

    Lets think about the moral argument first. Economics does not deal with morality. In an ideal world an incapable individual with a heart of gold would have the same comfort as anyone else. While I don't agree with Jadedjean's (29) excessive faith in the influence of genetics, she also raises the same point. But we don't live in an ideal world, and it is difficult for economics to deliver total justice. So the justice we aim for is broad brush, and because people earning 6 figure salaries will mostly not suffer that much.

    So lets now think about the pragmatic point (1). How do we drive people to achieve valuable things? If you think that generally someone earning 150k is doing a more valuable job for society than most people earning less, you are sadly mistaken. Your standard of living depends upon millions of people - the teacher that taught your IT guy, the cleaner who cleans your hospital, the engineer who built your roads, the scientists who made discoveries, the farmer that grows your potatoes. The system as a whole has to work. If you care about your standard of living, you shouldn't just think about your individual pension fund, you should be concerned about the situation of everyone that contributes value to your life, directly or indirectly. If the free market does not keep this system stable, then democratic interference is needed.

    Some libertarians would disagree with this, and argue that a free market can be used to optimise the system if it is set up correctly and left alone. However, bear in mind that without government noone would earn 180k in the first place, there would be no money, no legislation, no trust.

    So, please bear in mind that your standard of living is not just down to your individual virtues, it actually relies on a pretty big system working well.

  • Comment number 33.

    Captainarmchairhero - thanks for the response.

    I agree entirely there is a whole system that supported me. My parents whose combined income was a quarter of mine made sacrifices for their kids. I had good teachers. I got into a good university. And as I have aknowledged, luck played a big part. I am immensely grateful for all of it, especially the luck. I also agree that many lower paid people perform far more socially valuable jobs than I do - how could I not?

    My beef is with the lottery of life though. Earning 4 x my parents wage, I will still be no better off than them when I retire. Anyone that bought a house in the 70s or 80s has wealth - period. Anyone starting working life in the 00's and trying to do the same is having a much tougher time.

    This is not a "soak the rich" budget. It "soaks the earners". Anyone who is rich, has assets / wealth is not affected here. It is those trying to gain wealth that are targetted. So if you are born with cash you are fine, if you are trying to build up cash you are hit. So the rich stay rich and the club remains exclusive because upward mobility is all but impossible. How wonderful...

    I agree income levels are a bit of a lottery though you will perhaps concede that the individual has at least an element of influence over this. Compare this to wealth - this is 100% lottery - you're lucky, or you ain't.

    And why all the focus on headline income levels. What about the true income people are effectively earning with their final salary pension arrangements? A typical public sector "years worked over 60" or "years worked over 40" pension beats the pants off any defined contribution scheme going. Last week I had to earn 50% more than someone in the public sector on a "years worked over 40" pension and contribute all of my incremental income into my pension pot to end up with the same pension at the end of the day - i.e. achieve parity in terms of net cash through working life and retirement. Under the new rules I now need to earn 70% more.

    For a "years worked over 60" scheme, it just went from around 35% more to c.50% more. We need to recognise the true income that people are getting under their remuneration arrangements and not penalise one group of people relative to others. I am clearly not going to starve (unless I lose my job..) and am prepared to pay my bit, but let's do it equitably and let's introduce measures that will get results rather than introduce pain for pains sake or for political posturing when many believe it will make no material difference to tax take.

  • Comment number 34.

    People complain about public sector pensions, but they never realise what the real problem with them is. They're not necessarily unfair (Or at least used to be much less unfair given vastly lower public sector salaries); the government can't in a lot of cases match a private sector wage, especially the higher up the command chain you go. Yet, you need to equal the benefits of private sector employment to attract enough job applicants that you actually get to choose a competent employee for the job.

    The best way for the government to do this is to promise a big fat pension pot for it's workers - sacrifice higher wages now for more income and security in retirement. Yet the problem is the government shouldn't be able to offer such hefty pension schemes for the same reason private companies can't anymore - with people living longer and there being fewer and fewer taxpayers per pensioner as time goes on, due to lower birth rates, the government will have massive liabilities to cover at some point in the future. I'll bet that it might even be the case that at some point, even the government will have to close or cut back on it's hefty pension schemes - if the Civil Servants expecting to revieve such pensions ever get around to reminding the politicians.

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