According to the Budget 2010 Report, public sector current receipts in 2010-11 will be £541 billion. With expected public sector expenditure of £704 billion this leaves a deficit of £163 billion. Of these receipts, £146 billion or 27% is expected to come from income taxation. Several notable developments in the income tax system for 2010/11 include: the freezing of personal allowances, an income limit for personal allowances for those under 65, and the introduction of an additional income tax band.
Personal allowances are amounts of income that can be earned without being liable to income tax. This amount is to be frozen in 2010/11 at the level of 2009/10 so that for an individual under 65, this limit will remain at £6,475. Allowances are typically raised each year in accordance with the rate of price inflation. This then helps to reduce, in part, what is called fiscal drag. Fiscal drag occurs when there is an increase in the proportion of income taken in income tax as a result of allowances not being adjusted for inflation or for the rate of growth in earnings. In other words, by not increasing the amount of income exempt from taxation in 2010/11, any individual whose earnings rise will pay a higher proportion of their earnings in income taxation.
Another change in 2010-11 is the introduction of an income limit on personal allowances for those earning over £100,000. For every £1 earned above this limit, 50 pence will be taken from the allowance. Hence, given the allowance of £6,475 an individual earning £112,950 or more (i.e. £12,950 over the limit) will, in effect, no longer receive any personal allowance.
Now consider changes to the tax brackets. In 2009/10, an individual with an income tax liability of up to £37,400 (i.e. earnings of up to £43,875, once the personal allowance has been taken into account) pays income tax at 20%. This is the ‘basic rate’ band. With a liability of over £37,400, the excess (i.e. the amount over £37,400) is subject to tax at 40%. This is known as the ‘high rate band’. From the 1st April 2010, there is to be an ‘additional rate’ of 50%. The 50% rate will apply to taxable income over £150,000, while taxable income up to £37,400 will continue to be taxed at 20% and that between £37,401 and £150,000 will be taxed at 40%.
Now, an illustration of how the changes for 2010/11 will affect two individuals. Firstly, consider somebody on £110,000. Their tax allowance is ‘reduced’ by £5,000 to £1,475 and so they have a tax liability of £108,525. Of this, they will pay £7,480 at the basic rate (20% of £37,400) and £28,450 at the higher rate (40% of £71,125). With a tax bill of £35,930, their average rate of income tax in 2010-11 will be 32.66%. In 2009/10, the total tax bill will have been £33,930 (20% of £37,400 plus 40% of £66,125) and so an average rate of tax 30.85%
Finally, consider an individual on £200,000. Their income tax bill in 2010/11 will be £77,520 (20% of £37,400 plus 40% of £112,600 plus 50% of £50,000) and so they will face an average rate of tax income tax of 38.76%. In 2009/10 the tax bill would have been £69,930 (20% of £37,400 plus 40% of`£156,125), an average rate of income tax of 34.97%
Articles
The £20 billion tax raid about to hit The Times, Lauren Thompson (27/3/10)
How to beat the new 50% top rate of tax The Times , Mark Atherton (27/3/10)
Budget 2010: Darling draws election battle lines BBC News (24/3/10)
High earners will feel like they have taken a pummelling The Scotsman, Jeff Salway (27/3/10)
Further information
For the full Budget Report, see Budget 2010: Complete Report HM Treasury, March 2010
(The above consists of the two elements, Economic and Fiscal Strategy Report and Financial Statement and Budget Report. It’s a fairly large pdf file and may take a few seconds to download.)
For the particular measures and their impact on government expenditure and/or revenue, see Annex A: Budget policy decisions of the Financial Statement and Budget Report.
See also Rates and allowances – Income taxation HM Revenue and Customs
(Note: from here you can also link to other tax rates.)
Questions
- Consider the efficiency and equity arguments for and against the income tax changes in 2010/11.
- What do you understand by the terms the marginal rate of tax and the average rate of tax?
- How will the changes to the income tax system in 2010/11 affect the marginal and average income tax rates? You could perhaps try plotting these in a chart for different gross incomes.
- How can fiscal drag occur even if personal allowances are raised by the rate of inflation?
The Labour government’s investment in education has been widely publicised since its rise to power in 1997 and there has been a significant increase in funding to match its ‘50% participation in higher education’ target. However, at the university level, this looks set to change. More than 100 universities face a drop in their government grants as a consequence of £450 million worth of cuts. 69 universities face cuts in cash terms and another 37 have rises below 2 per cent. Furthermore, increased funding is now going to those departments where research is of the highest quality, which means that whilst some universities will not see a cut in funding, they will see a reallocation of their funds.
Sir Alan Langlands, Chief Executive of Hefce, said: “These are very modest reductions. I think it is quite likely that universities will be able to cope with these without in any way undermining the student experience.” Despite this reassurance, there are concerns that, with these spending cuts and growing student numbers, class sizes will have to increase, the quality of the education may fall and ultimately, it may mean a reduction in the number of places offered. The Conservatives have estimated that 275,000 students will miss out on a place. UCAS applications have grown by 23% – or 106,389 – so far this year, but the number of places has been reduced by 6000. This policy of cutting places is clearly contrary to the government’s target of 50% participation.
With the average degree costing students over £9000, it is hardly surprising that students are unhappy with these spending cuts and the fact that it could lead to a lower quality education. With the possibility of rising fees (in particular, as advocated by Lord Patten, who has called for the abolition of a “preposterous” £3,200 cap on student tuition fees) and a lower quality degree, this means that students could end up paying a very high price for a university education.
Articles
Universities fear research funding cuts Financial Times (18/3/10)
More students but who will pay? BBC News, Sean Coughlan (18/3/10)
University cuts announced as recession bites Reuters (18/3/10)
How about $200,000 dollars for a degree? BBC News, Sean Coughlan (18/3/10)
Liberate our universities Telegraph (17/3/10)
Universities should set own fees, say Oxford Chancellor Patten Independent, Richard Garner (17/3/10)
University budgets to be slashed by up to 14% Guardian, Jessica Shepherd (18/3/10)
Universities face cuts as Hefce deals with first funding drop in years RSC, Chemistry World (17/3/10)
University cuts spell campus turmoil BBC News, Hannah Richardson (18/3/10)
Universities told of funding cuts Press Association (18/3/10)
100 universities suffer as government announces £450 million of cuts Times Online, Greg Hurst (18/3/10)
Data
HEFCE announces funding of £7.3 billion for universities and colleges in England HEFCE News (18/3/10)
Questions
- Why is there justification for government intervention in higher education? Think about the issues of efficiency and equity and why the market for education fails.
- What are the arguments (a) for and (b) against allowing universities to set their own tuition fees?
- Why is the government planning these substantial cuts to university funding, when it is still trying to increase the number of students getting places at university?
- Is the ‘50% participation in higher education’ a good policy?
- What are the benefits of education? Think about those accruing to the individual and those gained by society. Can you use this to explain why the government has role in intervening in the market for higher education?
- Is it right that more spending should go to those departments with higher quality research? What are the arguments for and against this policy?
- What are the costs to a student of a university education and how will they change with funding cuts and possibly higher tuition fees?
The happiness literature has established that, in the developed countries, increasing affluence has not increased well-being in recent decades. We seek an explanation for this in terms of conspicuous consumption, a phenomenon originally identified by Veblen.
This is from the abstract of an article in the Economic Journal, ‘Well-being and Affluence in the Presence of a Veblen Good’ by B. Curtis Eaton and Mukesh Eswaran. The authors argue that while increased affluence of the rich may bring a small amount of extra benefit to them, it actually reduces the well-being of others who crave after things that they cannot afford. As the first article below states:
[The authors] believe their work shows that as a nation becomes wealthier, consumption shifts increasingly to buying status symbols with no intrinsic value – such as lavish jewellery, designer clothes and luxury cars. But they warn: “These goods represent a ‘zero-sum game’ for society: they satisfy the owners, making them appear wealthy, but everyone else is left feeling worse off.”
… There is another downside. As people yearn for more status symbols they have less time or inclination for helping others. This, the authors argue, damages “community and trust”, which are vital to an economy because they ensure the smooth running of society.
But do the super wealthy generate more jobs and more prosperity? Do we need to pay vast salaries and bonuses as incentives for executives to take risks: to invest in new products and processes, and drive technological advance and productivity increases? According to the second article, ‘Too few of the world’s billionaires can claim to be honest-to-God productive entrepreneurs who have enlarged the economic pie by dint of hard work, imagination, risk taking and innovation – although thankfully a useful proportion do populate the list.’
So is the ever widening gap between rich and poor necessary if the economy is to grow? Or is it something of very little value to society, except, perhaps, for the super rich themselves?
Articles
More money makes society miserable, warns report The Observer, Jamie Doward (14/3/10)
Don’t celebrate these billionaires, be horrified by their existence The Observer, Will Hutton (14/3/10)
Data
For the latest Guardian survey of executive pay, see: Executive pay survey, 2009
For data on UK incomes and income distribution, see: Annual Survey of Hours and Earnings (ASHE) Office for National Statistics
For data on the distribution of wealth in the UK, see Distribution of Personal Wealth HM Revenue and Customs
Questions
- Explain what is meant by a ‘Veblen good’.
- What is meant by the diminishing marginal utility of income? What implications does this have for the effects of income distribution and redistribution on social well-being?
- Why may a rise in GDP make society worse off if it is accompanied by growing inequality?
- To what extent can marginal productivity theory explain the salaries and other rewards of the wealthy?
- Using the data below, examine the extent to which the gap between rich and poor is growing.
- Explain why increasing conspicuous consumption by the wealthy might be a zero-sum game for society or even a negative-sum game.
- What factors cause a rise in productivity?
- How might greater entrepreneurship be encouraged in the UK?
Throughout October we saw widespread strikes, from bins to the post and airline flights to buses – and it’s not yet over. (See article The Winter of Discontent: the sequel?) Last November, BA cut the number of cabin crew members, despite strike action, which delayed hundreds of flights. This issue has yet to be resolved and over the weekend, there were further talks to try to reach some agreement. However, no truce was reached and so further strikes are now expected. Indeed, the Unite union announced the results of another ballot of cabin crew, showing even larger support for strike action.
However, BA is not the only airline facing strike action. Some 4000 pilots at Lufthansa, a German airline, called a four-day strike, following disputes over job security. This has led to thousands of flights being cancelled and thousands of passengers left stranded. Although the strike was suspended after one day, the dispute is not settled.
The stimulus for this action appears to date back to the huge turnover that Lufthansa made in 2007, with pilots feeling they should have a share in this success, along with its recent purchase of Austrian Airlines and the need to turn this into a profitable enterprise. The Lufthansa pilots are concerned that foreign pilots will be brought in to replace them in order to reduce costs. The airline fears that this strike could cost them about £21.9 million per day. With both sides unwilling to yield, it looks as though many passengers may find themselves stranded for a bit longer.
Articles
Questions
- How effective is the strike action by Lufthansa and BA likely to be? Which factors affect this?
- With a huge turnover in 2007, why were pay cuts at Lufthansa felt to be necessary by the company?
- How would wages be determined in the airline industry without trade unions? Illustrate this on a diagram and use that to explain why some workers get paid more than others.
- On your diagram of wage determination, now illustrate the effects of a trade union entering the market. How are wages and the equilibrium level of employment affected?
- Other than striking, what other options do workers and unions have?
- If strike action is costly to BA and Lufthansa, why don’t they simply agree to the unions’ demands?
In 2008, the UK government set up a National Equality Panel to investigate inequality. “The Panel was asked to investigate the relationships between the distributions of various kinds of economic outcome on the one hand and people’s characteristics and circumstances on the other.” The panel delivered its report, An Anatomy of Economic Inequality in the UK, in January 2010. It “addresses questions such as how far up or down do people from different backgrounds typically come in the distributions of earnings, income or wealth?”
The aspects of inequality examined include: educational outcomes, employment status, wages and other sources of income (such as benefits) both for the individual and the household, and wealth. “In our main report, we present information on the distributions of these outcomes for the population as a whole. Where possible we indicate how they have changed in the last decade or more, and how the UK compares with other industrialised countries. But our main focus is on the position of different social groups within the distributions of each outcome.”
A major influence on people’s income was the income, wealth and class of their parents since these affected education, peer groups and a whole range of other life chances. This made it virtually impossible to achieve equality of opportunity.
The report also looks at policy implications. These include not just the redistribution of incomes, but also the more fundamental issue of how to create equality of opportunity. “The challenge that our report puts down to all political parties is how do you create a level playing field when there are such large differences between the resources that different people have available to them.”
So what has happened to inequality? What explanations can be offered? And what can be done to lessen inequality? The following articles look at the findings of the report and offer their own judgements and analysis.
Rich-poor divide ‘wider than 40 years ago’ BBC News (27/1/10)
The Big Question: Why has the equality gap widened even through the years of plenty? Independent, Sarah Cassidy (28/1/10)
UK is one of world’s most ‘unequal’ societies Irish Times, Mark Hennessy (28/1/10)
Unequal Britain: richest 10% are now 100 times better off than the poorest Guardian, Amelia Gentleman and Hélène Mulholland (27/1/10)
No equality in opportunity Guardian, Phillip Blond and John Milbank (27/1/10)
Has the wealth gap really widened? Guardian, Tom Clark (27/1/10)
Inequality in a meritocracy Financial Times, Christopher Caldwell (29/1/10)
Who wants equality if it means equal poverty? (including video) Times Online, Antonia Senior (29/1/10)
A Major miracle on equality Public Finance, Richard Reeves (29/1/10)
UK one of the worlds most unequal societies; report says The Sikh Times (29/1/10)
Only policies, not posturing, will bring down inequality Independent (28/1/10)
The Report
The full 457-page report can be accessed here.
A 44-page summary of the report can be accessed here.
A 6-page executive summary can be accessed here.
Click here for the charts and tables from the report.
Another good source of information on the distribution of income is the Annual Survey of Hours and Earnings published by the Office for National Statistics.
Questions
- How can we measure inequality?
- Outline the findings of the report.
- Why is inequality so high in the UK and why has it continued to deepen?
- Have tax credits helped to reduce inequality?
- To what extent are greater equality and faster economic growth compatible economic objectives? How are incentives relevant to your answer?
- What specific policies could be adopted to give greater equality of opportunity? Identify the opportunity costs of such policies.
