Budget 2012: Osborne's massive "granny tax" gamble

CHANCELLOR George Osborne will abolish age-related allowances from April 2013 to help pay for a cut in the highest rate of income tax from 50% to 45%.

Mr Osborne defended the decision, stating it was part of a wider policy of simplifying tax, but the undeniable truth is that millions of older folk will lose out over the next few years.

The age-related allowances in the coming tax year are £10,500 for pensioners aged between 65 and 74, and £10,660 for people older than 75.
 
But those amounts will be frozen from April 2013 for those who are within those age brackets until the standard personal allowance catches up. Meanwhile, anyone who becomes 65 after April 2013 will only get the standard allowance of £9205. 

This means a person turning 65 in the coming tax year will receive an annual allowance of £10,500 but a person turning 65 after April 2013 will only get the £9205 amount. 

Now, of course, Mr Osborne will receive credit for raising the main personal allowance to the £9205 mark in line with the policy of his party's coalition partners, the Liberal Democrats.

However, his decision to freeze the age-related allowances for pensioners to pay for a cut to the higher rate tax band is a bold political gamble.

In the Commons, Mr Osborne defended the move to scrap the 50p rate, stating a report by HM Revenue & Customs confirmed it had damaged the UK's competitiveness.

The Chancellor added that the rate had "caused massive distortions" and "raised next to nothing", and he stated that those taxpayers would pay "five times more" to the exchequer due to changes to stamp duty levies and a new cap on tax relief.

"No chancellor can justify a tax rate that damages our economy and raises next to nothing," said Mr Osborne.

Nevertheless, as BBC's Nick Robinson pointed out, the policies set out in the Budget still mean that a higher-rate taxpayer who does not buy any property or use any tax relief will still gain significantly at the expense of a pensioner in April 2013.

Labour leader Ed Miliband was quick to pick up on this fact, labelling Mr Osborne's plans a "millionaire's Budget which squeezes the middle".

Mr Miliband added: "After today's Budget, millions will be paying more, while millionaires will be paying less."

But, while the latter part of that statement may or may not be true - it is hard to tell at this point - it is certainly the case that Mr Osborne is testing the loyalty of some of the Conservative party's supporter base.

Labour is back in the lead in most polls but the Tories retain a plurality of support among the over 65s in almost all cases.

Mr Osborne and Prime Minister David Cameron also hold a lead, by 32% to 26%, over Mr Miliband and Shadow Chancellor Ed Balls in terms of being trusted with the economy.

However, both of these positions will soon disappear if Mr Osborne's decision to freeze age-related allowances becomes seen as akin to Labour's shocking removal of the 10% starting rate in 2007.

That dreadful move cost Gordon Brown much support for his claim to economic competence, even before the financial crisis hit a year later.

And so - regardless of the justification for their lowering of the 50% tax rate - the separate issue of the removal of pensioners' allowances means the coalition may have just committed their own fatal income tax error.

 Meanwhile, in other moves in his third Budget, Mr Osborne...
- Forecast growth to be 0.8% in 2012 and 2% in 2013, 2.7% in 2014 and 3% in the two years after that. (Note: While the 2012 figures are improved from the news in his Autumn Statement when Mr Osborne had announced growth for 2012 would be just 0.7%, they compare unfavourably with the forecast of 2.5% made 12 months ago. Mr Miliband suggested the figures were proof that the Government's plan had failed).

- Cut the rate of corporation tax by 2% to 24%, adding it would further reduce to 22% by 2014.

- Promised to address loopholes in the VAT system while retaining the usual exemptions on food, clothes, books and newspapers.

- Tweaked the coalition's policy on Child Benefit so that its removal from higher rate taxpayers is tapered. (Note: despite this, the inherent unfairness of the policy remains: a couple both earning £40,000 will not lose any Child Benefit but a household in which only one partner earns over £50,000 will lose out).

- Announced that the planned 3p rise in fuel duty in August would go-ahead, and that vehicle excise duty will increase in line with inflation.

- Hit smokers the hardest in terms of duties with a 5% above-inflation rise on a packet of cigarettes, the equivalent of 37p on a packet. There was no change to alcohol duties but a new duty was introduced on gaming machines.


2012 BUDGET DETAILS
Growth forecasts/Fiscal policy
*Growth will be 0.8% in 2012, and 2% in 2013.
*Borrowing in 2012 will be £126bn, falling to £120bn in 2013, £98bn in 2014, eventually to £21bn in 2017. Government saving £36bn in debt interest.
*Independent OBR expects inflation in 2012 to be 2.8%, falling in 2013 to 1.9%.
*OBR forecasts unemployment to peak this year at 8.7% before falling each year to 6.3% in five years.

Taxation/State Pension/Child Benefit
*Abolition of age-related personal allowances for over-65s, as from April 2013.
*Highest rate of income tax will be 45% from April 2013, stays at 50% for 2012-3 - as HMRC report proves it damages the UK's competitiveness, and "caused massive distortions".
*Personal tax-free allowance to £8105 for 2012-13 to £9205 from April 2013.
*Consultation on tax/NI simplification to be published next month.
*From 2014, 20m people to receive new personal tax statement, detailing what they are paying and what they are paying for.
*Corporation tax rate cut by 2% to 24%; will be 22% by 2014. Banks continue to get no benefit from corporation tax rate due to bank levy being increased to 0.105%, raising £2.5bn per year.
*Loopholes in VAT system to be addressed but exemptions to stay on food, clothes, and books.
*Increase on stamp duty to 7% on homes worth more than £2m (or 15% on residential properties of more than £2m bought by a company).
*New cap on tax relief set at 25% of total income for anyone claiming more than £50,000 in a year, but no significant change to pensions relief.
*State Pension to rise by £5.30 per week. Single tier pension to be set around £140 and based upon future contributions for future pensioners. Automatic review of state pension age.
*Child benefit only withdrawn from higher rate taxpayers if someone in household has income of more than £50,000 - gradual withdrawal of 1% for every £100 above £50,000.

Levies
*Alcohol: No further changes.
*Cigarettes: 5% rise above inflation, equivalent of 37p extra duty on a packet of cigarettes.
*Fuel: No further changes. Above-inflation rises will only return if price of oil falls below £45 a barrel.
*Vehicle excise: Increased in line with inflation - but frozen for road hauliers.
*Gambling: New duty on gaming machines at a standard rate of 20% and a lower rate for low-prize machines of 5% of net takings.

Investment
*Increased private investment in roads.
*Network Rail to upgrade Trans-Pennine rail route between Manchester and Sheffield; improvement to the lines between Manchester and Preston, and Manchester and Blackpool.
*24 enterprise zones now operating, new enterprise zone in Deeside, Wales. Enhanced capital allowances for businesses setting up in new Scottish enterprise zones (Dundee, Irvine, Nigg).
*Spending on Afghanistan £2.4bn lower than planned. Extra £100m for military housing, 100% council tax relief for armed forces overseas, family welfare grant for armed fores doubled.
*£3bn tax allowances for oil exploration in Shetlands.
*Tax credit for television, video games and animation industries.
*£100m support for new university science research facilities.
*£70m fund for new jobs and businesses in London.
*£150m to help local councils promote development.
*Funding for superfast broadband and wi-fi in the UK's 10 largest cities with £50m available for smaller cities.

Miscellaneous
*Royal Mail pension fund assets switched to Treasury control.
*Sunday trading laws relaxed for eight weeks commencing on 22 July.

Resignation season

GOVERNMENT Director of Communications Andy Coulson became the second major political figure in under 24 years to resign after Shadow Chancellor Alan Johnson quit yesterday.

Mr Coulson stood down today having endured months of speculation over claims that phone-hacking took place at the News of the World while he was editor.

Yesterday evening, Mr Johnson left his post from the Opposition front bench "for personal reasons", amid allegations that his wife had an affair with a policeman assigned to protect him.

And, while both resignations come in rather different circumstances, it is much harder to spot the difference between the lack of judgement of the two main party leaders.

Resignation #1: Andy Coulson
Government Director of Communications (until today at 11:37GMT today)

Prime minister David Cameron first appointed Mr Coulson as Director of Communications in 2007 while the Conservatives were still in Opposition.

However, even back then, the arrival of the former News of the World editor caused a stir and the decision by Mr Cameron was questioned.

After all, these phone-hacking allegations, which have since stunk out the Wapping offices of the News of the World, were prevalent then.

And Mr Coulson was only able to take up his post at Conservative Central Office because he had resigned from the Rupert Murdoch-owned paper after Royal correspondent Clive Goodman was jailed for plotting to intercept phone messages.

For his part, Mr Coulson has always denied any knowledge of the phone-hacking scandal - and, indeed, the newspaper has always maintained the practice was down to a single rogue reporter in Goodman.

However, that claim is in danger of unravelling after the paper's hired private investigator Glenn Mulcaire told a court this week that the head of news Ian Edmonson commissioned him to access voicemail messages.

Of course, Mr Mulcaire's claim does not corrupt Mr Coulson in itself - but it is fair to say that the former editor now has some questions to answer.

And, undoubtedly, Mr Coulson would find it much easier to answer to the allegations without somehow having to deal with the press on a daily basis.

Bafflingly, Mr Cameron does not seem to understand this, claiming that Mr Coulson has been "punished for the same offence twice".

True, Mr Coulson has had to resign twice but then it was a surprise he got the chance in the first place, given the allegations hanging over him.

As Mr Coulson today said himself: "When the spokesman needs a spokesman, it's time to move on", echoing a line used in September by The Thick Of It writer Armando Iannucci.

Surely, Mr Cameron must realise this.

Resignation #2: Alan Johnson
The Labour Party's Shadow Chancellor (until yesterday at 17:00GMT)

While Mr Coulson's resignation has perhaps been coming for some time, Mr Johnson's departure "for personal reasons" was a genuine bolt from the blue.

Several newspapers now carry the story that his resignation relates to his wife's affair with a policeman employed to protect him while he was Home Secretary.

From this, Mr Johnson appears to be blameless and the popular former postman's promising political career has crashed around him through little fault of his own.

However, Labour party leader Ed Miliband must take a share of the blame - not for the affair, of course, but for a poor political strategy which left Mr Johnson flailing.

Mr Miliband appointed Mr Johnson as Shadow Chancellor in order to temper the influence of Brownite economist Ed Balls.

But Mr Johnson was ill-suited to job, admitting on his first day that he needs an "economics primer".

The MP for West Hull and Hessle was subsequently caught out by not knowing the rate of employers' National Insurance contributions or the rate of VAT on food.

However, given Mr Johnson's overall appeal to voters, it was likely that he would have been given time to grow into the position - and so his resignation was still a shock.

Now, Mr Balls is back and in a stronger position than before as Mr Miliband cannot afford to lose another Shadow Chancellor.

In other words, it could be said that Mr Balls has his party leader by the... er, balls.

Of course, the Conservatives will hardly find it difficult to associate Mr Balls with the size of the deficit left by Mr Cameron's predecessor Gordon Brown.

Mr Balls was in as an adviser to Mr Brown for 13 years between 1994 and 2007 until he became Secretary of State for Children, Schools and Families.

Much now depends on the relationship between Mr Miliband and Mr Balls - and the ability of the latter to land hefty blows on his opposite number, George Osborne.

All in all, a rather messy end to the week in Westminster - and a week which has left both main parties shuffling their pack and scratching their heads over just what might happen next.