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.

Gone postal

IT'S OFFICIAL ! The posties have gone postal - or their union has, at least.

The Communication Workers Union (CWU) has confirmed today that a 24-hour nationwide strike will go ahead from 4am on Thursday.

But their decision to take industrial action is a baffling one to me and holds little support from the public or politicians of all colours.

Even among the Royal Mail workers, the strike holds little sway.

The vote may have been carried by a clear margin of three to one but that was only among those who voted.

There were over 19,000 who voted 'No', over 20,000 who did not vote and another 20,000 not part of the union.

Perhaps they remember the lack of success in the last strike - held not long ago, in 2007 - when a small pay increase was described as a victory.

But it was a hollow success. The workers lost nearly as much as their rise by going on strike in the first place and this was a major reason why my relatives who work for Royal Mail abstained.

It is not difficult to fathom why external support for the CWU action is so low, given the horrendous timing of it.

People are right to be concerned that, if the action continues right up until Christmas, it will become infinitely more difficult for gifts to be sent between family members.

Even though some companies have already transferred their allegiance to private couriers, that same move is easier said than done for individuals who need to send off presents to far-flung relatives.

To follow the companies' lead, they would have to abandon probably the best thing remaining about using the Royal Mail - its low pricing.

Self-employed traders and others who must fill out an HMRC tax return may also be frustrated with the paper returns deadline of October 31 now fast approaching.

Striking in a recession does not reflect well, anyway. The latest employment statistics show there are now nearly three million people out of work.

It is little wonder Royal Mail bosses have had little trouble to find the required 30,000 casual staff to fill the gap.

I do not deny that the staff have valid grievances especially with the threat of machines taking over their jobs.

And my political views far removed from those of a Thatcherite, eager to crush the trade union movement.

But surely the union's best tactic to protect its workers in this case would be to continue to negotiate better terms with the employer.

It is the only way which the conflict can come to an end, anyway.

After all, the CWU should be careful - they could end up doing more harm than good for the hard-working posties.

The increase of internet access has already dealt a blow. Since 2005, the number of letters delivered has decreased from a high of 84 million a day to just 75 million now.

And though that still remains a phenomenal number, surely the priority should be not to lose any more customers.

The last thing a union should be doing is shooting its workers in the foot.