Four tests for Osborne’s Budget


Published on Public Finances and the Economy

This post originally appeared on The Spectator

With the Coalition taking pre-Budget briefing to new levels you’d be excused for thinking there’s little we don’t know about tomorrow’s statement. But here are four questions we can’t yet answer, and that will be crucial to assessing whether this is a Budget for low-to-middle earners as the Chancellor claims:

1) Will the new increase in the personal allowance be restricted to basic rate taxpayers? When the Coalition raised the allowance by £1,000 back in April 2011 they cancelled out the benefits to those at the top by lowering the 40p tax threshold. The second time around — the £630 increase that kicks in this April — they didn’t. From the sound of things, Osborne is now set to announce a further large increase in the allowance for 2013 and possibly even beyond. So will he focus the benefits on basic rate taxpayers this time?

Both options carry their own particular poison. Limiting the benefits saves money and makes the policy more genuinely targeted at low — though not the lowest — earners. But it also means creating hundreds of thousands of new higher rate taxpayers. By contrast, not limiting the benefits means you’re spending huge amounts on a tax cut for some of the richest households in the country, including those earning up to £200,000. That’s not an easy argument to make when you’re taking Child Benefit away from households on £50,000, on the grounds that it’s now an unaffordable expense.

2) How far will Osborne go in cleaning up the Child Benefit mess? Back in October he announced the withdrawal of Child Benefit from households containing a higher rate taxpayer from January 2013. As has been widely discussed, for all its popular appeal this move creates an administrative nightmare. The best technical fix — paying CB through the tax credit system — will be deemed politically unpalatable, requiring millions more families to fill out complicated tax credit applications. Yet the current plan also seems untenable.

Right now, it looks likely Osborne will err on the side of simplicity and just raise the point at which Child Benefit is withdrawn, probably to around £50,000. That would save roughly 430,000 families from losing out compared to current plans. But he could also decide to withdraw CB more slowly as people’s wages rise, to avoid creating an ugly new cliff-edge in the tax system. This latter option would leave a less embarrassing mess for a Chancellor with aspirations to be a tax reformer. But it also costs a lot more. Either way, a U-turn on the Child Benefit policy opens up space on Question 1 above, breaking the link between the 40p tax threshold and the loss of CB.

3) Will there be any concessions on Working Tax Credit cuts? This one is definitely a long shot, but by telling Andrew Marr on Sunday that this will a ‘Budget for low and middle earners,’ the Chancellor has certainly not played down expectations. He’ll know well that his headline tax giveaway — the personal allowance policy — is far from the best way of targeting this group. And he’ll also know that £1.3 billion of new Working Tax Credit cuts are set to kick in this April, hitting low income working families between the eyes. Will he brazen out this mismatch? Or could there be a gesture to this group? One popular rabbit to draw from the hat would be an expansion of childcare, now a crippling expense for many working parents. Osborne has surprised us on this front before.

4) The big one: where will the money come from? Despite the austerity mantra, all the rumours —from the allowance to a partial U-turn on Child Benefit and 50p, not to mention possible growth measures — add up to a pretty penny. As ever, billions will no doubt be found from new crackdowns on tax avoidance (pity the poor Treasury official tasked with generating this number). And no doubt there is some substance to this, with the tax gap remaining colossal, even after falls in recent years. But it does seem likely the Chancellor will want at least one more concrete revenue raiser in the list. Most probable is a reduction in top rate Pension Tax Relief, with a decrease in the annual cap on contributions that qualify from £50,000 to £40,000. Could he also move in other areas? It wouldn’t be the first time he’s outplayed us at the expectations game.