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?
Whilst the internet and technological developments provide massive opportunities, they also create problems. For some time now, newspapers have seen declining sales, as more and more information becomes available online. Type something into Google or any other search engine and you will typically find thousands of relevant articles, even if the story has only just broken. As revenue from newspaper sales falls, revenue has to be made somewhere else to continue investment in ‘frontline journalism’. The question is: where will this come from?
The Financial Times and News Corp’s Wall Street Journal charge readers for online access and we can expect this to become more common from May, when the Times and the Sunday Times launch their new websites, where users will be charged for access. Subscription to these online news articles will be £1 per day or £2 for weekly access. Whilst the Executives of the Times admit that they will lose many online readers, they hope that the relatively low price, combined with a differentiated product will be enough of an incentive to keep readers reading.
Critics of this strategy argue that this a high risk strategy, as there is so much information available online. Whilst the BBC does plan to curtail the scope of its website, the Times and Sunday Times will still face competition from them, as well as the Guardian, the Independent, Reuters, etc., all of whom currently do not charge for online access. However, if you value journalism, then surely it’s right that a price should be charged to read it. Only time will tell how successful a strategy this is likely to be and whether we can expect other online news sites to follow their example.
Times and Sunday Times websites to charge from June (including video) BBC News (26/3/10)
Murdoch to launch UK web paywall in June Financial Times, Tim Bradshaw (26/3/10)
Times and Sunday Times websites to start charging from June Guardian, Mercedes Bunz (26/3/09)
News Corp to charge for UK Times Online from June Reuters (26/3/10)
Murdoch-owned newspaper charges for content BBC News (14/1/10)
Questions
- Why have newspaper sales declined?
- How might estimates of elasticity have been used to make the decision to charge to view online articles?
- ’If people value journalism, they should pay for it.’ What key economic concepts are being considered within that statement?
- Why is charging for access to the Times Online viewed as a high-risk strategy?
- What are the advantages and disadvantages of this strategy? To what extent do you think it is likely that other newspapers will soon follow suit?
- Which consumers do you think will be most affected by this strategy?
- In what ways might non-pay sites gain from theTimes’ charging policy?
- Would you continue to read articles from the Times linked from this site if you had to pay to access them? If so, why? If not, why not? (We want to know!!)
A keenly awaited Budget, but what should we have expected? Chancellor Alistair Darling had warned that it wouldn’t be a ‘giveaway’ budget. The aim to cut the budget deficit in half over 4 years still remains and the UK economy is certainly not out of the woods yet.
You’ve probably seen the debate amongst politicians and economists over what should happen to government spending and it might be that the lower than expected net borrowing for 2009-2010 provides a much needed boost to the economy. With the election approaching, it seemed likely that some of this unexpected windfall would be spent. The following articles consider some key issues ahead of the 2010 Budget.
Budget 2010: Alistair Darling’s election budget BBC News, Stephanie Flanders (21/3/10)
Build-up to the Budget Deloitte, UK March 2010
Pre-Budget Report: What Alistair Darling has announced before Guardian, Katie Allen (9/12/09)
Budget 2010: Darling warns of ‘no giveaway’ BBC News (11/3/10)
FTSE climbs ahead of UK Budget Financial Times, Neil Dennis (24/3/10)
Bank bonus tax could net Treasury £2bn, E&Y says Telegraph, Angela Monaghan (24/3/10)
Alistair Darling set for stamp duty move BBC News (24/3/10)
Labour has run out of steam, says David Cameron Guardian, Haroon Siddique (24/3/10)
Ten things to look out for in the 2010 Budget Scotsman (24/3/10)
Sammy Wilson predicts ‘neutral budget’ BBC News, Ireland (24/3/10)
Do the right thing, Darling Guardian (24/3/10)
What do we want from the Budget? Daily Politics (23/3/10)
Budget boost for Labour as inflation falls to 3% TimesOnline (24/3/10)
Questions
- Why has the FTSE climbed ahead of the Budget?
- Why is there a possibility of a rise in stamp duty again? To what extent do you think it will be effective?
- Net borrowing for 2009/10 is expected to be lower than forecast. What should happen to this so-called ‘windfall’?
- What is expected from the Budget 2010? Once the Budget has taken place, think about the extent to which expectations were fulfilled.
- Why are excise duties on goods such as taxes and alcohol likely to be more effective than those on other goods?
The latest inflation numbers are a joy for headline writers! With the falling price of toys, we can perhaps speak of ‘inflation toying with us’, while the fall in the cost of gas might allow us to say that ‘gas takes the fuel out of inflation’. More generally, the latest inflation figures from the Office for National Statistics (ONS) show the annual rate of CPI inflation falling from 3.5% in January to 3% in February. In other words, the weighted price of a representative basket of consumer goods and services rose by 3% in the 12 months to February as compared with 3.5% over the 12 months to January.
In compiling the Consumer Price Index (CPI), the ONS collects something in the range of 180,000 price quotations over 650 representative goods and services. These goods and services fall into 12 broad product groups. The items to be selected for these groups are reviewed once a year so that, in the face of changing tastes and preferences and changes in the goods and services available to us, the ‘CPI shopping basket’ remains representative. A price index and a rate of price inflation are available for each of these 12 broad groups as well as for goods and services within these groups. So, for instance, we can obtain a price for ‘transport’, then, within this group, we can obtain a price for the purchase of ‘vehicles’ and, finally, a price for ‘new cars’ and for ‘second-hand cars’. This level of detail also means that individuals can calculate their own personal inflation rates using the ONS personal inflation calculator.
So what of the latest fall in the rate of CPI inflation? Well, the ONS reports ‘widespread’ downward pressures. This phrase needs some careful unpicking. Downward pressure is reported from ‘recreation and culture’ because its average price was static in February, but rose a year earlier. Within this group, the average price of games, toys and hobbies fell this year, but increased a year ago and, so, our possible headline ‘inflation is toying with us’. Similarly, downward pressure is reported from ‘housing and household services’ where a fall in its average price this year follows static prices a year ago. A major driver of this change was a reduction in average gas bills and so our other possible headline, ‘gas takes the fuel out of inflation’.
The latest price numbers from the ONS show that some product groups are experiencing long-term price deflation. For instance, while the average price of ‘clothing and footwear’ actually rose in February, when we analyse annual rates of price inflation for this product group, one has to go back to March 1992 to find the last time it was positive! Indeed, within the slightly narrower product group of ‘clothing’, the average annual rate of price deflation over the past ten years has been 6.1%. A similar longer-term trend of price deflation can be found in the product group ‘audio-visual, photo and data processing’. Here there has been an average annual rate of price deflation of 9.9% over the past ten years. So, smile for the camera!
Articles
Rates set to remain at record low as inflation falls back sharply heraldscotland, Ian McConnell (23/3/10)
Inflation data boosts government before budget AFP (23/3/10)
UK inflation rate falls to 3% in February BBC News (23/3/10) )
Inflation slows more than expected Reuters UK, David Milliken and Christina Fincher (23/3/10)
UK inflation falls sharply to 3% Financial Times, Daniel Pimlott (23/3/10)
Inflation rate fell to 3 per cent in February Independent. James Moore (24/3/10)
Inflation falls back to 3% Guardian, Philip Inman (23/3/10)
How soon before we scrap the Bank’s inflation target? Telegraph, Edmund Conway (23/3/10)
Data
Latest on inflation Office for National Statistics (23/3/10)
Consumer Price Indices, Statistical Bulletin, March 2010 Office for National Statistics (23/3/10)
Consumer Price Indices, Time Series Data Office for National Statistics
For CPI (Harmonised Index of Consumer Prices) data for EU countries, see:
HICP European Central Bank
Questions
- Explain the difference between an increase in the level of prices and an increase in the rate of price inflation.
- The annual rate of price inflation for clothing in February was -3.9%. If the average price of clothing was cheaper, year-on-year, how could it have exerted ‘upward’ pressure on the overall rate of CPI inflation?
- What factors might help to explain why, over the past 10 years, the average annual rate of price inflation for audio-visual, photo and data processing equipment has been -9.9%?
- What factors might help to explain why, over the past 10 years, the average annual rate of price inflation for clothing and footwear has been -5.7%?
- What factors might help to explain why the annual rate of ‘new car’ price inflation was 5.4% in February 2010 compared with -0.2% in February 2009?
- What factors might help to explain why the annual rate of ‘second-hand’ car price inflation was 19.0% in February 2010 compared with -15.1% in February 2009? And, are you surprised at the difference in the rates of ‘new’ and ‘second-hand’ car price inflation?
Ofcom, the communications regulator, is keen to encourage the spread of super-fast broadband through investment in fibre-optic cabling. So far, super-fast broadband is available to around 46 per cent of the UK population. Both Virgin Media (formerly Telewest and NTL) and BT have invested in fibre optic cables, but Ofcom is keen to extend the use to rival companies.
It proposes two methods: the first is to give competitors access to BT’s cables; the second is to allow competitors to install their own cables using BT’s ducts and telegraph poles. In both cases BT would charge companies to use its infrastructure and would be free to set prices so as to ensure a ‘fair rate of return’.
The articles below consider this ‘solution’ and its likely success in developing competition in the super-fast broadband market through competition, or whether BT’s and Virgin’s market dominance will continue to the detriment of consumers. You can also find links below to the Ofcom report and summaries
Articles
BT welcomes Ofcom’s fibre access plans Reuters, Kate Holton (23/3/10)
Ofcom to encourage super-fast broadband Business Financial Newswire (23/3/10)
Ofcom tells BT to open its fibre network ShareCast (23/3/10)
Ofcom wants BT to open up infrastructure Financial Times, Philip Stafford (23/3/10)
Ofcom push to give broadband rivals access to BT tunnels Financial Times, Tim Bradshaw and Andrew Parker (23/3/10)
BT UK Pushes Ofcom to Open Virgin Medias Broadband Cable Ducts SamKnows, Phil Thompson (23/3/10)
BT welcomes Ofcom’s fibre access plans ISPreview, MarkJ (8/3/10)
Report and summaries
Summary: Enabling a super-fast broadband Britain Ofcom (23/3/10)
Review of the wholesale local access market: full document Ofcom (23/3/10)
Review of the wholesale local access market: summary Ofcom (23/3/10)
Questions
- What forms does competition take in the broadband market?
- What are the barriers to entry to the super-fast broadband market?
- Are fibre-optic networks a natural monopoly? Explain the significance of your answer for competition in the super-fast broadband market.
- Will Ofcom’s desire for BT to get a fair return on its wholesale pricing of access to its cabling, ducts and telegraph poles be sufficient to ensure effective competition and that profits are not excessive?
- Explain whether it would be in consumers’ interests for competitors to be given access to Virgin’s cables and ducts.