The Budget (UK)
Today (26 November) is Budget day here in the UK. Several so called leaks have it that the two child universal credit cap will go and taxes go up. Some are saying that both the Chancellor and the Prime Minister will go if they don’t get this right. They need to pull an elephant out the hat not a rabbit to change attitudes.
Comments
The State Pension is going up by around four times the rate of inflation though. I guess they want retired people to be dependent on the state rather than private pension schemes.
My understanding is that the limits on cash ISAs are meant to encourage people into investing more e.g. in stocks and shares ISAs. For long term financial security this is probably a good general direction to be pushing, though of course it risks further asset price inflation.
The people chucking loads of extra money into their pension are not, by and large, people likely to be worrying about financial security in old age. I think the restriction on salary sacrifice is aimed at people using it to subsidise their purchase of top-of-the-range racing bikes and the like.
Cynical, moi?
Well, it fits in with Reeves idea that there should be more investment in UK companies, but the problem with that idea is that the reason for the lack of investment has been the lack of returns.
That measure is specific to pensions though (and fwiw around 60% of all companies in the UK operate salary sacrifice schemes for pensions specifically).
Not sure what's so terrible about dropping the cash ISA limit to £12,000 a year - are there really people who can afford to save over £1000 a month?
Will this budget encourage spending? I don’t think so. We need to keep money going round to pay staff etc.
Indeed it is specific to pensions. And £2,000 a year is really not that much - assuming a 5% salary sacrifice being put towards ones pension (not an unreasonable amount, and many people may well currently choose to put more in to improve their chances of a decent life after retirement) it equates to a salary of only £40,000 per year before tax.
Thanks for the clarification - salary sacrifice for other matters had been mentioned before the budget so I got mixed up.
From what I've read it sounds like the change is just to move salary sacrifice pension contributions into the same bracket as regular ones i.e. you pay NI on them but not income tax, because it remains the case that you pay income tax but not NI on pension income. But I may have misunderstood that too!
The problem is that leaving personal allowances as that by increasing the number of people falling into the higher rate of tax you further disincentivise an increase in industrial productivity.
When it comes to lowering the cash ISA limit in a bid to increase investment into stocks and shares products, thinking it will boost investment in industry, this will only work if she can tackle the mind-set of fund managers to think long-term. One of the things that holds back industry in the UK is investor short-termism. It would make far more sense to have tax bands on profits that taper with the length of time a stock is held, and bigger alllowances for R&D.
Really? Why? Surely it encourages people to seek higher wages to offset paying more tax and thus incentivises productivity?
Modest changes in effective marginal rates of tax are unlikely to have a strong effect on behavior. Artificially high spiky marginal effective tax rates are much more likely to alter behavior. People who make £100,000 are certainly well off, and could afford to pay a few extra quid in tax. But the personal allowance is removed at a rate of 50p for every pound of additional income here, which is effectively an additional 20 percentage points of marginal tax for incomes between £100,000 and £125,000. After £125,000, the marginal rate drops down again. That's a stupid tax structure. The consequence is that if you look at the annual reported income of UK taxpayers, there's a big spike just below £100,000. People do appear to choose not to do extra work when facing effective marginal rates above 60%.
There is only one point in the tax system where tax would take "most of" an increase, and that is if you're in the fortunate position of earning over £100k and fall into the personal allowance clawback. Even then the effective rate is lower than for, say, someone on Universal Credit.
The spike in people reporting taxable earnings just below the 100k threshold is in large part people pumping money into pensions and other tax avoidance mechanisms rather than avoiding pay rises or cutting hours.
Exactly this.
The effect of holding tax thresholds down on behaviour is hugely overstated* by parts of the media and people with an agenda.
It is a tax increase - all other things being equal - it is a real terms tax increase for nearly everyone but there are some important caveats to this:
Firstly, unlike a hike in the rate, it does not translate into a drop in cash income. Secondly, it is not automatic and only kicks in when someone has a pay rise. If you are not getting your inflation rise, then you don't pay any more tax. I think this important as pay rises do not happen automatically for most. Thirdly, because the higher rates (i.e. 20% vs 0% and 40% vs 20%) only occur on the additional income, it is a very small difference to overall income for an individual.
There are two places where people are likely to feel it: firstly if it means that a pay rise ends up being less in cash terms than they might have expected; that can be disappointing and secondly, where having gone into a higher rate, the tax on extra work on top feels more burdensome. I.e. Previously, you may have been paid £160 for some extra work, it now becomes £120.** That will disincentivise some but not others. We all make decisions about extra work, based on how valuable the time/effort is to us vs spending time doing other things such as time with the family.***
More importantly, and not talked about nearly enough by the pundits (you really have to go digging to find this out) is that in both budgets Ms Reeves has put a lot of money into capital investment. That's what really matters in the long term. The reasons why the UK economy is struggling so much at the moment are simply these:
1. Austerity (when capital investment suffered most of all)
2. Brexit
3. Covid (a combination of government ineptitude and waste and the long-term effects on the working-age population)
4. Ukraine
5. Trump
That's in chronological order but probably that's the correct one in terms of magnitude of the effect of each as well.
The long-term stuff is far more important here than the changes in income tax and NI.
The other thing is that the debate about fiscal rules is completely wrong. They are really important in terms of managing market expectations and thereby controlling the cost of borrowing for the government and the private sector. Reeves has worked hard to ensure that the overall picture is one of 'sound money.' She should not be attacked for that approach and understanding the need to maintain that financial credibility. The issue is that she set herself relatively bad fiscal rules and she could and should have made better ones.
AFZ
*This is mostly opinion. I believe it is well-grounded opinion based on what I have read and thinking about this properly. The basic reasoning is laid about above and I think is sound. However, it should be caveated that it is a logical argument rather than something I am demonstrating by evidence. I am sure this has been studied and I will have a look to see what I can find.
**Simple maths here that £200 gross pay subject to a 20% rate becomes £160 net, whilst attracting a 40% rate makes it £120 net. (Just income tax, ignoring NI for the sake of simplicity here).
***'All' might be incorrect. Many people work in jobs where extra earning opportunities don't exist. I want to acknowledge that but the principle is sound and how much personal A wants for an extra hour of work is different to person B and will depend on multiple other factors as well.
Are you seeking to distinguish between the way that our behaviour is influenced by the way we think about income in nominal terms, compared to the way we think about the tax we pay in real (or realer) terms?
The correct critique is that this was done for largely ideological reasons ('third way') and led to a more expensive outcome in the longer term. It's not true to say that it gave a 'false impression of national prosperity' -- it would have been perfectly possible for institutions - possibly backed by local or national governments - to build these facilities themselves, and doing so would have created a stream of earnings into the future (as well as lowered overall cost).
The reason for addressing this in the here and now is that I see that the UK government is still attached to this thinking, with large amounts of announced capital investment actually consisting of de-risking private provision in a way that has a lot of downside, followed by cost into the future. The various shocks of the last few years (Covid, Trump, Ukraine etc) are an argument for more state capacity rather than less.
Some quickly became very costly debacles, eg the public/private partnerships for maintaining the London Underground.
Right, but the point was they were affordable - it's more like the situation where someone could have gone to a bank and got a sustainable business loan to invest, but instead chose to go into business with someone who had 'The' as one of their middle names.
My point was twofold. The minor point was that an additional benefit of raising revenue through freezing thresholds is that it harms less those whose pay is not keeping up with inflation. If you put the rate of tax up then your taxes go up even as your real income falls.
The major point though was to counter the narrative that these changes affect behaviour in a way that harms productivity. I don't believe that logic holds and so far I have found zero evidence to support the idea that people will significantly change their behaviour because of the freeze.
AFZ
This isn't a narrative I've come across. (It's probably not where where I'd think to start, looking at the relationship between pay and productivity.) Poking around: