They say that all good things come in threes, so today I bring you the 3rd and final part of my pre-Budget trilogy. Think of me as your Godfather of good sense. In this concluding episode of budgetary brilliance I will focus on what help the chancellor should offer individual taxpayers – the general public.
My first two articles explained what needs to be done to support businesses. Those articles were predicated on the estimate by the highly authoritative Institute for Fiscal Studies that the chancellor had around £31 billion available to spend. But as we approach the Budget there is more information coming out, and the other day the National Institute of Economic and Social Research (NIESR) published a report stating: “the Chancellor has a large amount of fiscal space ahead of his budget on 15 March. We estimate this to be £166.0 billion for his deficit target and £97.5 billion for his debt target”. NIESR is a respected think tank but these figures are rather higher than other analysts have estimated. But even if the suggestion that the chancellor can afford Budget give-aways of the order of £100 billion is exaggerated (and I am not therefore basing my proposals on this), it still does suggest that Jeremy Hunt has sufficient money he can use to stimulate the economy and help the British people during the current cost of living crisis.
I am assuming that the press speculation that Hunt will extend the freeze on energy prices is accurate. Even at the capped level it is far too high, but this is due to the government's energy policies and lunatic Net Zero agenda, which I will write about another time. Today I will look at the three main taxes that affect us all: income tax, VAT and fuel duties. I could, of course, also talk about a host of other taxes, such as stamp duty or air passenger duty or inheritance tax, but I believe that Budgets are more effective if they avoid a lot of trivial tinkering and focus their firepower – the money available for investment and tax cuts - on a small number of key areas.
Income Tax
What many people don't realise is that except for the ultra-high earners, people in Britain are becoming much poorer relative to those in the rest of Europe. Back in 2005 the median disposable income in Britain (adjusted for purchasing power) was around £15,000, equivalent to €17,000 and higher than Germany's €16,000. But by 2010 the median income here had fallen below that in Germany, France and other European countries - including Ireland, the Netherlands and Belgium! By 2018, UK incomes were just 9% higher than they were in 2005, compared with 40% higher in Germany – and right now our real wages (ie. after taking inflation into account) are actually falling! We desperately need tax cuts so that people can start to be better off.
The first and the most important thing that the chancellor needs to do is raise the personal allowance (the amount you can earn before you start paying tax) to at least £20,000. £25,000 would be better still, but I accept this might not be affordable at the moment and should therefore be announced as the longer-term aspiration. Note that an adult working full-time (40 hrs/wk) on the minimum wage of £9.50/hr earns £19,740 a year – but the personal allowance is currently only £12,570. So those on the minimum wage are currently paying income tax, and therefore actually taking home less than the minimum amount the government says they need! My proposal to increase the personal allowance to at least £20,000 therefore makes perfect sense and can be defended as both fair and sensible. I would also restore the personal allowance to everyone (currently those on higher earnings lose this), so that all taxpayers benefit, but proportionately those who will benefit the most will be those on lower wages – the very ones that need the most help!
The chancellor is likely to promise that he will reduce the basic rate of tax, dangling the carrot of a 1% cut 'as soon as the economy improves', thinking this will induce people to vote Tory. Well, I suppose some will be fooled, but the truth is that increasing the personal allowance is actually much more beneficial than cutting the basic tax rate. A little simple maths shows this to be true: as I pointed out above, someone on the minimum wage working full-time will earn £19,740/yr. If the personal allowance was raised to £20,000 they would be £1,434/yr better off. This would make a real difference to them. However, reducing the tax rate from 20% to 19% would leave them just £71.70 a year better off – less than £1.38 a week, or under 20p a day. So don't be conned by the Conservatives: a cut in the basic rate of tax is of no real value. What we need is an increase in the personal allowance.
As well as increasing the threshold for paying the basic rate of tax, the threshold for the 40% higher rate should also be raised, from the current £50,270 [£12,570 personal allowance + £37,700] to £75,000 [£20,000 personal allowance + £55,000]. By not increasing the tax thresholds in recent years the government has created what is called 'fiscal drag': this means that with wages going up due to inflation, people who previously were paying the basic rate of tax now suddenly find themselves in the higher tax bracket. So now even your average headmasters, middle managers, dentists, doctors and even train drivers are all paying the higher rate. So guess what? They all want large pay rises to make up for this. The government has created the problem of high wage demands and strikes by trying to sneakily steal more and more of our wages in taxes! And the appalling Sunak and Hunt 'dumbvirate' plan to continue this stealth theft until 2028, dragging an extra 3.2 million people into the standard rate of tax and 2.6 million into the higher rate.
Finally, I would leave the top rate of tax unchanged at 45%, and retain the current £150,000 threshold (although in reality this would become £170,000, once you include the £20,000 personal allowance that I propose). In last November's Autumn Statement Hunt announced he would cut the threshold to £125,140 this April, a proposal I would scrap as this is already a very high tax rate compared to some of our main competitors, such as Switzerland (where the top rate is 40%), the US (37%) or Singapore (22%) - not to mention all those middle eastern countries where it is 0%! Top rate taxpayers are often very mobile and will leave if they are squeezed too hard, meaning that you actually get less tax revenue when you put the tax rate up. The logical thing to do would actually be to eliminate this top rate altogether, but politically and emotionally now is not the time to do this – as tin-eared Truss discovered to her cost!
These tax changes would benefit everyone but would principally help those on lower wages and the so-called JAMs - the 'Just About Managing' – who are constantly being promised “jam tomorrow … but never jam today”.
Apart from being highly popular, cutting people's taxes this way would mean the government could resist pay demands from public sector workers more easily, which would reduce public spending. And raising the personal allowance to £20,000 would also have the added benefit that, by taking everyone on the minimum wage out of tax altogether, it would simplify the system and save money on administration. Instead, by not increasing the personal allowance, the Conservatives are actually dragging millions of workers into the tax system!
VAT and Fuel Duties
Why do we have to pay VAT on a burger but not on a sandwich – unless it's toasted, when you do pay VAT, but not if it's a bagel, when you don't, even if it's toasted? Or on essentials like toothpaste and toilet paper but not on luxuries like caviar? Or on crisps but not on tortilla chips? The VAT rules are idiotic and unfair and need changing. We need to sweep away the current convoluted rules and exemptions which, believe it or not, even led to a huge court case to decide if Jaffa Cakes were cakes (VAT exempt) or biscuits (not exempt)! By the way, in case you're curious, the final verdict was that they are cakes. Well, what a great use of our legal system that was. I therefore propose to scrap the current complicated system and move to a simple one which is purely based on the value of the item being sold. This is how it would work:
i. No VAT on anything under £10, or on domestic electricity or gas
ii. 10% VAT on goods between £10-20
iii. 20% (the current VAT rate) on all items above £20
This would be much fairer, benefit everyone buying their daily essentials, and dramatically reduce inflation.
In recent years, at every Budget, the chancellor has made a big fanfare about not increasing fuel taxes. It reveals a lot about the mentality of our money-grabbing political class that they think we should be grateful when they don't put taxes up. No, I'm not grateful that they haven't made things worse! What we need is a serious cut in fuel duties. Cutting the cost of petrol and diesel would have a hugely beneficial effect in so many ways. It would cut inflation, thereby moderating wage demands and government spending on inflation-linked benefits, it would reduce the costs that hauliers face, and therefore the cost of products in the shops, and it would benefit those people who are dependent on their cars (particularly those living in the countryside). Each 10p/litre cut only only costs the government £5 billion, which while it may sound a lot is actually small beer in terms of overall government income and expenditure. Depending on the true state of the government's finances it may even be possible for them to cut fuel duties by 20p per litre.
TL;DR
Raise the personal allowance (the threshold for paying income tax) for everyone to £20,000
No change to the higher rate of tax (40%) but raise the threshold to £75,000
No change to the top rate of tax (45%) but with a new effective threshold of £170,000
Change the VAT rates so that cheaper items are taxed less (or not at all)
Cut the duty on petrol and diesel by at least 10p per litre
These changes would increase everyone's standard of living, but benefit the lowest paid the most. They would also cut the rate of inflation and boost the economy. This is a Budget that would be popular, perfectly affordable and help the whole country.
If you liked this article and agree with what I’m proposing don’t keep it to yourself - pass it on! And send a copy of all three parts of my patriotic Budget to your MP, asking him what he thinks.
A Patriotic Budget – Part 3
Excellent work and a fine summary. I too track dear Old Blighty as it rides down the rolling wave of no return - "you can check in but never leave!" I write a weekly 'Letter from Great Britain' for mainly my American readers (70%) and I am sure we compliment each other. I will link you in next Saturday - my team will love this because it's much more detailed. Good to have another angle as I tend to be rather cynical but I do look for good news!
Best wishes
AP: https://austrianpeter.substack.com/p/good-news-kings-ransom-never-again?utm_source=post-email-title&publication_id=762792&post_id=112009781&isFreemail=false&utm_medium=email