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The 30% Granny Tax Trap Osborne Could Set for Labour

Well, Conservatives can take heart that at least incompetence isn’t restricted only to their own side, as a top Labour spin-doctor admits that they screwed up when they failed to vote against the cutting of the 50p tax rate.

However, it may well be too late now to repair the damage done by the incompetent handling of the gradual withdrawal of the age-related allowance (ARA) – the so called ‘granny tax’. The incompetence, however, was not to decision to withdraw it; it was a sensible move given that the significant increases in the standard personal allowance is making the ARA redundant. No, the incompetence is to miss the biggest win resulting from the move: the abolition – not imposition – of a granny tax.

The biggest negative side-effect of the ARA was the abatement mechanism: the gradual withdrawal of the allowance as the pensioner’s income approached the income limit (currently £24,000 for 2011/12). With £1 of allowance being lost for every £2 in extra income, the abatement added an extra 10p effective marginal tax rate on top of the existing 20p.*

Yes, George Osborne last week abolished the 30% granny tax.

However, thanks to the government’s slow-witted spin operation, it became regarded as the imposition of a tax. How useless does a PR operation at the highest level of domestic government have to be to manage such a disastrous inversion of the message?

Those pensioners who are only on the state pension will not be affected by the ARA withdrawal, as they will be nowhere near that abatement band. Those on more than £24k would similarly be unaffected, as they will not be benefiting from the ARA anyway. Those in the middle are being relieved of a 30% marginal tax rate. What’s not to like?

There is, at least, an opportunity here to salvage what little advantage may be left, to embarrass Labour and perhaps belatedly shore up some of the wavering support among the age bracket that is most likely to vote.

Labour will surely be tabling amendments on the ‘granny tax’. If the government spin-doctors can remove their shortest digits from their posteriors for a few minutes, then this could be legitimately presented as Labour trying to re-impose a penalty on age, a slap in the face for those who spent their working lives … blah blah blah…

I wouldn’t bank on it though. Frankly – and I shudder just typing this – Mandelson would have done a far better PR job.

* (It’s the same effect that creates a 60% rate, plus NI, between £100,000 and £114,950.


‘Do Nothing’ Should be Osborne’s Plans B to Z

You’re the captain of the super-tanker ‘Tired Metaphor’. You’ve only been there a few hours, taking command with your plan to jettison a modest amount of the unnecessary and badly distributed weight, to allow the vessel to right itself and thus be steered away from the iceberg that those Mediterranean leaky buckets over there have been heading straight for.

But despite having nudged the wheel only minutes ago, you can hear the old captain down in his cabin. He’s been working his way through his drinks cabinet, and is now so blotto that he can’t even see the icebergs anymore and thus thinks there never was any problem, and is saying that you’re doing it wrong anyway because the tanker isn’t turning on a sixpence.

Labour's car scrappage scheme - were you stimulated?

Yes, the Left are whining that the economy isn’t booming yet, and if only George Osborne were to commence another spending splurge – a.k.a. ‘fiscal stimulus*’ everything would be OK. The economy is grinding to a halt and yet Osborne’s doing nothing. After all, the stimulus that Alistair Darling embarked upon was such a success, wasn’t it?

Err, no. Apart from the sickening sight of thousands of perfectly good cars being destroyed as part of the scrappage scheme (a bung for the motor industry dressed up in green clothing to get round EU state aid rules), the extra spending added even more to the public debt total, increased the deficit and yet as soon as the stimulus ended (as it inevitably had to, because there was no money left, remember?) everything drifted back to a near-halt.

This is the fundamental problem with ‘fiscal stimulus’. The ‘multiplier effect’ is a mirage because for every pound spent by the state, a multiple of that pound must first be generated by the private sector. It must be raised through tax, either now or in the future; the latter not only presenting a net drain on the economy, but also adding to upward pressure on interest rates. On top of that, the state pouring money (back) into the economy will be inflationary.

So, the Left seem to think that pushing up taxes, interest rates and inflation is the way to get the economy moving do they? Fiscal ‘stimulus’ may provide some short-term relief, but it doesn’t significantly shorten the time it will take for the economy to recover. The culmination of a twelve month recovery will be two years’ away if we embark on a year of ‘stimulus’.

The problems we have seen in recent years are down to one thing: debt. First, it was business and personal debt – specifically the ‘toxic debt’ – that gave rise to the ‘first’ financial crisis. (And no, its not just ‘the bankers’ to blame: for every irresponsible lender there must, by definition, be an irresponsible borrower.)

The shock of that episode then sent its waves towards the other great indebted institutions: governments.

It is the addiction to debt (and for governments its parents, interventionism and excessive public spending) that is the problem here. Not surprisingly, as with an addict in the early stages of their withdrawal, many people are screaming for more of their drug. Just as with drugs, the comfort that comes with another shot is short term. Just as with an addict, every shot puts off their recovery. “Just one more dose, please”, cry the Left (and, unsurprisingly, some sectors of business), “then we promise we’ll be able to give up”.

George Osborne should stay strong (some would say be stronger and bolder). Do not give in to the debt addicts, you’ll only put off their – and the nation’s – recovery.

Not for the first time, I find myself quoting Reagan: “Don’t just do something, stand there.”

* A caveat for the future: my definition of fiscal stimulus for these purposes is purely one involving increasing public spending: tax cuts are no such thing; they involve leaving money in the economy and thus present a real lasting positive effect.

The Emergency Budget: A Triumph of Expectations Management

Well, the big headline – the 20% VAT rate was expected. Proportionately it is a lower increase than Labour’s return of VAT to 17.5% at the start of this year, introduced when the economy was arguably weaker than it’s likely to be next January. Not that I’m happy that we are increasing taxes – even marginally less unfair taxes such as VAT – but we all know who is really responsible, and it shouldn’t have been a great surprise for students of the nuances of political language – “we have no plans to…” means little in the unpredictable political climate of 2010.

All in all, the scare stories that were inexplicably circulating before the budget did make the actual thing seem a lot a expected. Capital Gains Tax will only go up to 28%, not the 50% that a return to a pre-2008 arrangement would have meant. Child benefit remains, albeit frozen. More interestingly, it remains universal; and, one could argue, why not, given that those on higher incomes have paid more tax and thus may feel entitled to get something back from the system.

Then the increase in the personal allowance will be worth around £200 to many people.

The bank levy will not be a transaction based Robin Hood Tax, and combined with the reduction in the main corporation tax rate may not trigger the flight that some feared – though time will tell. Expect other governments to now react in a similar direction, including the xenophobic White House (they may be itching to re-fight the American Revolution, but that won’t stop them welcoming, at least privately, the moves on this side of the pond).

There’s still more to digest, but that is largely a function of the quantity of significant measures in the speech, rather than the time-bombs that Labour used to hide away to explode during the committee stages. Something new that we will have to get used to, is the reaction of the Lib Dem coalition partners. Hysterical Hattie, in response to Osborne, may have a point when she highlighted how many Lib Dem MPs would have campaigned against the very measures contained in today’s budget.

Forget Tinkering with PAYE, George: Just Scrap National Insurance

It's an elephant, and it's probably in a room. I thought it was cuter than the real thing, though.

About ten days ago, we learned that the Conservatives were thinking of scrapping the PAYE system. Tax will be deducted via the banking system, it seems, relieving employers of having to act as unpaid tax collectors. The PAYE system is under strain from the number of people who change jobs more regularly, and have multiple sources of income, all combined with the general complexity of the tax system these days.

I can only assume that the policy is at an “embryonic stage”, as details were thin on the ground. Nevertheless, it is worth testing just how radical or effective such a policy would actually be, even though the objective of reducing burdens on business is a sound one.


Let’s start with the employer’s position. Obviously an employer will still have to calculate the amount of pay due for the month or week. Those records will still have to kept as part of his/her proper accounting records, as well as to satisfy various employment regulations. If an occupational pension scheme is in place, a staff loan, or attachment of earnings order for example, then those deductions will still have to be calculated and recorded. What of statutory payments such as Statutory Maternity Pay, which is based on earnings levels, and the compensation that is reimbursed to the employer? Such amounts will still have to be accounted for and recorded. Shall I mention the taxation of benefits in kind, such as company cars or medical insurance?

Then let us not forget Employer’s National Insurance – the tax on jobs. How would this be accounted for and paid over without a payroll system looking pretty similar to those of today? Add into the mix the number of employers these days who use computerised payroll systems – even if it’s the software that HM Revenue & Customs (HMRC) provides – and the question is how much administrative burden will actually be removed from businesses by this move?

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The PM Who (Doesn’t) Like To Say Yes

To be more precise, I expect he will say yes to Sky’s Leaders’ Debate, but he won’t like doing it. Then again, since I doubt either Cameron or the other one will be asking him, Andrew Marr style, about the contents of his bathroom cabinet, he might feel now that it won’t be all that bad.

Brown will say yes because he has no other choice. The trouble is, like a guilty person who has taken too long to answer a straight question, the real issue is why he didn’t just accept the invitation when the other two leaders did. One reason might be that it took this long for Labour strategists to come up with the strategy that was being rumoured last night: that Labour will suggest that there should also be debates between the top front-benchers as well.

So, in the Treasury debate, we will have Darling, Osborne and Cable.

Without fawning interviewers on the other side of the microphone, Vince Cable will probably see his media sainthood finally revoked.

Darling’s strategy will surely be to perform competently enough to keep himself in the running for the subsequent Labour bloodbath leadership race. His greatest difficulty will probably be to refrain from pointing out that it was all Gordon’s fault and that, like a Crimean battlefield nurse, there was little else he could have done. That line will, presumably, come after May (or March, depending on where you’ve put your money).

In fact, Osborne should be the only one who can really benefit – he already has to face jibes about his suitability for chancellor, based on his youth (and as he is only two days older than me, I am bound to defend him!). So with his stock already thus discounted, it would be the ideal arena for him to prove the sceptics wrong, and with Labour also now helpfully floating the unpalatable probability of tax rises and spending cuts, doing much of George’s expectations management for him, there will be little that he can really do wrong come the night.

Questions for George

My brain hurts, and it’s not because of last night’s excellent beer and curry event courtesy of the RSPCA, or any imbibing at the Grauniad or CWF receptions.

I made one of my rare forays into the main conference hall this morning to hear George Osborne. Over halfway through the speech and there it was: this year’s “inheritance tax moment” … a two year freeze of council tax (then ominously in the next sentence, “for those councils who sign up”).

I like the sound of this, but it does raise many questions. How will the mechanics of the scheme work? Will the extra money necessary be added to the formula grant – if so, then Councils on the grant floor* may not see it. Where will the money come from in any case? Do we know whether cutting back consultants and advertising will free up enough cash? Will the “freeze” relate to the headline council tax, including precepts, or just the borough/district/county’s own portion of the council tax? What happens then if, say, my borough were to “sign up” but the GLA was not? What strings will come attached?

* Ah yes, the grant floor. You’ll hear a lot about this if you hang around certain councillors too long. The formula that is used to determine how much central government gives to councils, in an increasing number of cases, is leading to a figure that would mean a significant cut in funding, so the “grant floor” is the safety net – a guaranteed increase. In Bromley’s case, the difference is in double millions. Even then, the grant floor recently has been increasing by far less than inflation (just 1.75% next year).