Budget in review

The increase in the National Minimum Wage for over-25s to converge on the Living Wage was a masterstroke, one which finally recognised that businesses, regardless of ability to pay, tend to pay staff as little as possible.
The increase will lead to the median wage increasing due to pay leads, so that £9.35 may well be rather below 60% of the median wage by 2020, but to give credit to the Chancellor, he appears to have recognised that left to itself, the market will tend to lead to a low wage economy.

There will be consequences for the public sector as a result. Low paid council workers, classroom assistants, and administrative staff in schools, the health service and other places – but not NICS staff – are likely to have a forced pay rise of well over the decreed 1% in successive Aprils to meet the new minimum wage, and median private sector pay will converge upon median public sector pay.  NICS staff will not be affected immediately, because the Equal Pay settlement of 2009 and successive stripping of low steps on the pay scale has already pushed all staff above the Living Wage.

The Chancellor is also to be credited – in principle – for his determination to reduce Government borrowing.  I disagree with his methods, partly because he is cutting spending rather than using taxation to balance the books, and partly because I believe in breaking even over the economic cycle, so it’s all right to borrow short term in recovery but then pay it off when times are good and surpluses are there to be run.

Borrowing can also be required short term for capital schemes which will in the end either cost the taxpayer nothing or provide a positive income to the Treasury but will cost money in the short term.

The news that HMRC is to be supported to the tune of an additional £800 million to chase tax evasion is extremely good news for the law-abiding taxpayer who could benefit from a tax cut without seeing public spending cut if all unpaid tax were recovered. 

The question is whether this amount of money is enough, but there are other measures to tackle tax avoidance, including dealing with those who pay themselves dividends from their own limited company in order to pay less tax than they would receive from a salary.

So, those are my positives from the budget. The master stroke that wrong-footed everyone, from unions to business, because it was so unexpected, and also rather uncharacteristic for a free market Government.

The rest?

I stand to gain from the increase in the personal tax allowance to £11,000 in April, especially as it isn’t coupled to increases in National Insurance Contributions or VAT.  Indeed, of the £74.725 billion impact over six years of the budget, £29.13 billion – 39% – comes from increases in tax take, with insurance premium tax, changes in collection dates for corporation tax and changes to dividend taxation being the main drivers here.

However, there is no mention of the lower threshold for NICs being increased, and while by 2021 those working 30 hours a week on the (under-25s) minimum wage will no longer be paying Income Tax per se, they will certainly be paying NICs on nearly half their income.

Public sector pay is to be restricted to 1% growth, and benefits other than State Pension and disability benefits are to be frozen. This works against the principle of ending a low pay economy, because it pushes public sector wages down towards private sector wages, rather than pulling private sector wages up.  In addition, the benefits freeze ignores the fact that over the economic cycle, benefits lag behind average wages due to being restricted to price inflation.

Much is made of the UK paying 7% of global expenditure on welfare, although I would see this as something to be proud of – it says more about other countries than it does about ourselves. Much as I hope never to need it before I reach State Pension Age (state pension being a very large proportion of the welfare bill), the system matters to me. I don’t need it now, but friends and family do. I might yet need it.

The headline that bothers me is the notice that child tax credits will not be paid for a third child initially claimed for from 2017. Yes, I can understand that people already reliant on benefits shouldn’t be planning additional children, but what about those in apparently secure employment with three or more children who unexpectedly lose their jobs? Should they be punished for making reasonable decisions when they could afford the consequences? Others have suggested that there could be an impact in demand for abortion in GB.

Other cuts will carry an expectation that the Assembly will either follow suit or fund the difference in cost themselves. With the Executive being less than willing to increase the regional rate, we could have another welfare crisis on our hands – and it’s another battle we cannot win unless the government majority in Parliament can somehow be overturned.

The increase in free childcare entitlement is meaningless to NI, as it doesn’t exist here. Its absence is a barrier to employment, and certainly to the ability to the mother of a 2 year old to get work as intended in the Budget, although lack of jobs and the ability or otherwise of the private sector to create jobs to employ voluntarily redundant [ok, exiting] public sector staff has already been questioned by economists who did not fail final year at QUB.

Corporation Tax rate changes will make it more difficult for NI to justify a cut due to convergence with Ireland in general, although it will mean that the block grant will be cut by less if the Assembly proceeds with a cut. It’s a double edged sword.

The other side of that is that the impact of a cut in Corporation Tax on local SMEs is debatable – when running a loss, no CT is due.

Car owners (ie nearly all of us!) received the good news that it will soon be possible to pay Vehicle Excise Duty for a three year old car registered in Northern Ireland online, because rather than waiting for the Assembly to change the MOT threshold to three years, they intend to bring GB into line with us.  VED itself is to be simplified, and again I will get a cut of £5 as all cars are sorted into 13 bands for the first year and three thereafter. Others will get bigger cuts, and many will have increases – only cars rated at 0gCO2/km will be zero rated. Cars over £40k list price will have to pay £310 extra a year for five years. Income in England will be ring fenced for the strategic road network, and presumably income in other regions will just go into the relevant block grant as usual.

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