Commenting on the 2014 Budget:
“Well, that was boring. The total tax and spending changes barely scratch the surface at around £2bn/year in each direction – that’s a tiny 0.3% of the £732bn the government is expected to spend this year. The exception may be the pensions announcements, which may prove to be very significant in the years to come.
“Much of the budget was gimmicky: inheritance tax exemptions for emergency services personnel who die in the line of duty must only affect a handful of people and giving LIBOR fines to Help For Heroes continues to be one of the most bizarre revenue hypothecations of modern times. Even the much-heralded ‘welfare cap’ can be easily undone by any Parliament that wishes to in future, so cannot count as more than a political stunt.
“If there is cause for optimism it is in the economic data released today, which shows that the labour market is rebounding strongly (even if productivity still leaves a lot to be desired), and the language used by the Chancellor. At last the government is speaking in dynamic terms, recognizing in rhetoric at least that lower tax rates can produce higher revenues. Mr Osborne is talking the talk on taxes, but he doesn’t have much time left to walk the walk.”
– Sam Bowman, Research Director, Adam Smith Institute
Pensions
“At last Britain's private pension savers will be treated like responsible adults. As lifetimes have lengthened and financial uncertainty has abounded, annuity rates have fallen, leaving savers much worse off then they expected. The rule has long been that, apart from a proportion that can be taken as a lump sum on retirement, pensioners have had to convert their retirement pot into an annuity, paying them a lifetime income. But as lifetimes have lengthened and financial uncertainty has abounded, annuity rates have fallen, leaving savers much worse off then they expected.
“From April 2015, retirees will be able to access their pension savings pretty much as they wish. Instead of being hit by a 55% tax if they took out 'too much', ordinary rates of tax will apply. So it all becomes much easier. You build up a pension pot while you work; on retirement, you can take 25% of that tax-free (a provision designed to help people with moving costs and other changes on retirement); then you can decide whether you will buy an annuity, draw down the pot at a set rate, or withdraw the whole sum, facing tax only at the prevailing marginal rate.
“Most people are perfectly capable of managing their retirement income and do not want to fall back on the state anyway. The new rules recognise that. On the rare occasions when governments treat us like adults, they should be encouraged.”
– Eamonn Butler, Director, Adam Smith Institute
Personal Allowance & National Insurance
“As anticipated, the income tax personal allowance has been raised to £10,500. That’s good, and will help nearly all workers, but the Chancellor missed the opportunity to tackle the National Insurance threshold, which is much lower than the personal allowance and affects low paid part-time workers who may not benefit from the personal allowance rise at all.
“A part-time worker earning £10,500 will pay no income tax, it is true, but they will still face a National Insurance bill for £330 a year. National Insurance is the great elephant in the room in British tax policy: although administered separately, it goes into exactly the same revenue pot as income tax. It desperately needs reform if the working poor are to be given the tax break that almost everyone agrees they need.
“Still, the rise to the personal allowance is better than nothing, and the government is right to pursue tax cuts for lower earners.”
– Sam Bowman
Childcare
“The government is right to recognise that childcare costs are becoming increasingly unaffordable throughout the UK: at £106.38 per week, the cost of 25 hours of childcare is unaffordable for many families.
“Ofsted regulations around childcare, such as stringent qualification requirements and low mandatory child-to-staff ratios, are some of the harshest in Europe, and have caused prices to skyrocket.
“These regulations have real consequences for the consumer: the UK ranks as the second highest spender in Europe on childcare services and parents are spending a staggering 28% on childcare in out-of-pocket costs.
“Unfortunately, the government’s proposals do nothing to address these supply-side factors, and will probably just perpetuate the vicious cycle of high costs. Families would benefit far more from deregulating the childcare sector than from increasing the childcare subsidies, which fund a highly distorted and expensive market.”
- Kate Andrews, Communications Manager and Research Associate, Adam Smith Institute
Missed opportunities
“The most obvious missed opportunity was the lack of any additional cut to Corporation Tax. Adam Smith Institute research has found that nearly 60% of the Corporation Tax comes out of workers’ wages, with the rest acting as a harmful tax on capital. The Chancellor could have boosted wages and stimulated the economy by cutting Corporation Tax even more, killing two birds with one stone.
“A change to the Bank of England’s remit. Inflation targeting has unequivocally failed, giving us the worst recession and slowest recovery in living memory. If the Bank were tasked with targeting Nominal GDP instead, as many prominent economists are now suggesting, the macroeconomy would likely improve immediately and remain stable during future supply shocks such as the 2008 Financial Crisis.” – Sam Bowman
For further comments or to arrange an interview, contact Kate Andrews, Communications Manager, at kate@adamsmith.org /07584 778 207.
The Adam Smith Institute is an independent libertarian think tank based in London. It advocates liberal public policies to create a richer, freer world.