CentreForum’s analysis of Budget 2013 (CentreForum blog)

Adam Corlett and Tom Frostick give CentreForum’s take on headline measures announced in Budget 2013.

Positive

Ending stamp duty on shares in growth markets

In our recent report ‘The path to IPO: funding SME jobs and growth’ we set out a range of measures for increasing equity investment in SMEs. We were therefore extremely pleased to see the adoption of our proposal to end stamp duty on shares in growth markets. Rolling back Britain’s very own financial transaction tax will boost liquidity and lower the cost of borrowing for high growth innovators. This is in addition to the planned consultation on allowing such shares to play a role in ISAs.

Reforming social care

The government’s decision to implement the Dilnot Commission proposals on the reform of social care is to be welcomed. A cap on lifetime social care costs of £72,000 may be higher than Dilnot envisaged, but the extension of the means-tested threshold for people in residential care is also higher at £118,000 (note that this figure is slightly lower than the £123,000 announced a few weeks ago). A small change in inheritance tax is a fair contribution to funding the cap, but better still would be to close the capital gains tax loophole we described in ‘Delivering Dilnot: paying for elderly care’.

Increasing the personal tax allowance

The government has brought forward the increase in the personal tax allowance to £10,000. This will now happen in April 2014 rather than end of the parliament as originally intended, and we can expect an increase beyond £10,000 the following year in line with inflation. The focus now is on what should come next. How can the government better target those on low incomes, and how should any further tax cut be funded? We will be exploring these issues in a forthcoming report.

Cutting the “jobs tax”

It is encouraging that the government has recognised the need to look at national insurance as well as the income tax allowance. But it may be that the cost of the new ‘employment allowance’, which will rise to over £1.7 billion by 2017, could have been spent in a simpler, more effective manner. Rather than singling out small businesses, one option would have been simply to increase the wage level at which all employers pay national insurance (which is far below the minimum wage).

Simplifying corporation tax

Regardless of the level at which it is set, confirmation that the main rate of corporation tax will be merged with the small profits rate is welcome. It joins a long list of tax complications that the Chancellor has ended.

Encouraging greater employee ownership

CentreForum has long been an advocate of giving employees a stake in the firms they work for, and so we support the government’s plan to introduce capital gains tax relief on sales of businesses to employees. More needs to be done to raise awareness of employee ownership, not least the positive impact it can have on productivity.

Ensuring monetary policy helps growth

The change in the monetary policy remit is perhaps less ambitious, or at least more underplayed, than expected. But any forward guidance that lowers the risk of investing in the UK will of course be welcome. This, and bolder alternatives, will be presented in a forthcoming CentreForum report.

Less positive

The distributional impact of Budget measures

Apart from the headline policies and projections, it is worth looking at the distributional analysis which is now released alongside the Budget. But the cumulative total of government tax and benefit changes remains – aside from the top ten per cent – distinctly regressive.

Capping welfare spending

One of the biggest surprises in the Budget is the plan to bring in a cap on “a significant proportion” of Annually Managed Expenditure (AME), which includes social security, debt interest and other volatile spending. Whatever the details, this proposal demands serious scrutiny. At present, it seems designed to meet political rather than policy needs. It would be difficult to ensure the cap will not interfere with the “automatic stabilisers” that meet the increased need for social security when the economy slumps. For example, will any increase in the UK’s debt interest bill force premature cuts on to welfare spending?

Demand side housing policy

There is an overwhelming need to see more homes built, both as a short term economic boost and in the long term. But it is difficult to see how today’s demand side measures under the ‘Help to Buy’ scheme will help. These measures could actually increase the cost of housing and may also mean that any significant fall in house prices results in big losses for the taxpayer. Far better would have been a rejuvenated effort to introduce community land auctions – which we proposed in 2007 and which were contained in Budgets 2011 and 2012 – or a scheme to give housing associations the ability to issue government backed bonds for the construction of new homes – which we called for in our submission to the last Autumn Statement.

Insufficient capital investment

The Budget should have been more adventurous in boosting capital investment. Although money will be shifted from other areas to capital spending, the additional £3 billion a year won’t come into play until 2015/16. This is hardly the immediate boost the economy needs, and should be seen in the light of calls for investment of tens of billions. With the government able to borrow at a rate of under two per cent, the Chancellor could have afforded to invest more in the short term growth without compromising his structural deficit target.

Childcare plans

A childcare funding settlement is well overdue and the government should be applauded for taking steps towards reaching one. But the settlement announced this week may not be enough. Childcare support will now come principally in the form of a free allowance for three and four year olds, plus some two year olds; a voucher scheme exclusively for better off, in-work parents; and the childcare element of universal credit. With considerable complexity within each of these, and many falling through the gaps, it would be tempting to bet that this settlement (alongside the government’s changes to child benefit) is not one we can expect to last.

The absence of national insurance reform

Broad national insurance reform was again notable by its absence. Two years ago, the Chancellor said it was time “we take this historic step to simplify our tax system and make it fit for the modern age” and announced a consultation on merging the operation of national insurance and income tax. While merging only their operation is itself less ambitious than some would like, we have yet to see this consultation.

Something-for-something on single tier pension reform

The introduction of the single tier pension is very welcome but makes more pressing the need to tackle the question of national insurance on self employment income. The self employed already pay considerably less national insurance than their different benefit entitlements would suggest. As one of the big winners in the pension reform, this gap is to grow larger still, giving employees a raw deal and passing over an opportunity to raise money in an equitable manner.

Originally published at https://centreforumblog.wordpress.com/2013/03/20/our-reaction-to-budget-2013/

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