Today(21st of March), George Osborne announced his budget and i decided to come up with a brief analysis of the budget as i realised there are some loopholes in it as i call them.
Generally, i quite liked the budget and wasn't as bad as many people were expecting and the funny thing with this years budget is that it sounded very good and looked very nice but there were a number of hidden issues behind these lovely plans which may surprise a large group of people, often called the "Middle Earners" but lets look at some of the main areas of the budget first:
- Tax Threshold raised to £10,000( £9,000 this year and £10,000 next year)
- A 1% cut in Corporaton Tax (1% this year and 2% the following year)
- Child Benefit became Means Tested
- Rise in a tax on Tobacco
- 50p tax dropped to 45p
Of course there are many other areas but these were the main ones which had problems associated with them in some ways. I would say that this budget wasn't a job creation budget however many might argue that it is.
Lets analyse the budget then:
-1% cut in corporation Tax:
A cut in corporation tax can be beneficial for 2 reasons;
1) It makes UK attarctive for business investement to large multinational and overseas firms which will mean there will be jobs created for people living here, which inevitably leads to less welfare payments, more tax revenues and higher spending by people. Furthermore, the jobs which will be created will cost the government next to nothing! And lets rememeber there will be higher tax revenues as a result.
2) This tax cut encourages more people to set up their own business and this itself can lead to higher tax revenues, and more employment by these new firms.
However, let's remember that the main job creators aren't the multinationals and are often domestic firms and lower taxes might not necessarily lead to higher employment as there are other factors too so you can't say this policy is directly aimed job creation but lets hope it works otherwise it may just be a loss in tax revenues and some extra profit for the firms perhaps!
-Tax Threshold raised to £10,000
Sounds great but hang on! I thought cutting the deficit was the priority so how is this tax cut financed? Well, according to Daily Mail, 300,000 more people are now paying 40% tax instead of the lower bound rate. Let me make it a bit simpler, before if you were earning over £44,000 you would pay 40% but now if you earn over £41,000 you will pay 40%. So basically the government is taking the money out of middle earners and give it to low earners. Now probably this is the best choice at the moment but obviously is a big surprise to middle earners.
-Child Benefit became Means Tested
Awesome but middle earners again but hey! you don't expect the poor to be heavily taxed so that child benefit would stay universal and the rich would be able to claim it too. Which is why i think it's a good decision to make child benefit means tested because, "If a benefit is universal, this results in poor being heavily taxed" and based on economics and our morals, we don't want that to happen.
-Rise in Tobbaco Tax
It's good because it discourages the consumption of cigarrets which means less smoking related diseases, therefore lower cost for the NHS so it's a good thing. Keeping in mind that currently there are increaing number of teenagers smoking and usually starting at 14 which is absolutely disastrous.
We can say it's bad because this might mean a fall in consumption, therefore we can expect some job losses and as predicted by labour, it will be around 5,000 across the tobacco industry. So it's a hard decision to make; do we want economic growth and higher tax revenues now or we want an unhealthy population which will cost NHS a fortune in the near future.
-50p tax dropped to 45p
This is a bit tricky and there are many strong arguments on both sides but here is the main case in favour of this tax cut and it's basically making UK more attractive for rich people to come and live in since the top rate of tax in some countries is 50% or higher so an incentive for the rich to transfer wealth into the UK. Also, this can work as an incentive for the rich to avoid tax avoidance and actually pay their taxes so basically contribute to tax revenues. However the main case against it is that any tax cuts now is an irresponsible decision due to the deficit that we have it may be an unfair thing to do and as its been stated, this policy decision doesn't affect many people and it's a small number of people around only 1,000,000 people so some may call it useless and a waste of time but again how is this tax cut funded? Well through a 7% stamp duty on houses over £2m which again won't raise much money since the majority of the population won't be included.
But here is the question which needs to be answered; how can these plans reduce the deficit? The deficit is now 76% of the GDP which is an alarming rate and needs to go down immediately but at the expense of what? Do we want to get rid of it at the expense of economic growth? At the expense of unemployment? UK's economy has already flatlined and is in a very fragile state and cannot be pushed any further than that.
I personally think that the problem cannot be solved by modifying the budget year after year. I think there is a fundamental problem which needs to be solved and the problem is something very familiar, "Jobs and Benefits".
I don't want to go into this topic in this post (Will do in the next post) but why in our economy, the largest area of government spending is on Benefits and social protection?
This is the fundamental problem. Don't get me wrong, i support social protection but there should be higher employment compared to social protection spending. If in a society where young people don't study or have no future ambitions and think of social protection as their firm choice instead of finding a job, then there is definitely something fundamentally wrong in that society.