Tag: tax allowances

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Changing the medicine

The incoming coalition government in the UK has been spelling out its fiscal policy. It is sticking to the Conservative pledge of cutting £6bn from government spending this fiscal year (6 April 2010 to 5 April 2011). It hopes to make most of these by ‘efficiency savings’ – in other words, providing the same level of service for less money. It has, however, said that it will take advice from the Treasury and the Bank of England as to whether the cuts need to be delayed if the economy weakens substantially.

But the Bank of England is forecasting a continuation of the recovery (see its latest Inflation Report below), even assuming no further quantitative easing beyond the £200bn of assets purchased by the Bank. The Governor, Mervyn King, feels that the economy can indeed bear the proposed £6bn cut in government spending and that this will also send an important signal to the market that the government is committed to reducing the deficit.

The new government has also said that it will honour the Liberal Democrat pledge to raise the personal tax free allowance on income tax to £10,000. It has also backtracked somewhat on the Conservative pledge not to raise national insurance. Only employers will be spared the rise; employees will have to pay it.

So has there been a major change in fiscal policy? Has the focus moved from one of maintaining aggregate demand in order to avoid falling back into recession to one of making a start on tackling the deficit straight away? Or is the change in emphasis more one of presentation than substance? The following webcasts looks at the new fiscal policy emerging from number 11 and at the latest forecasts for growth and inflation.

Webcasts

What kind of medicine is the economy going to be fed? BBC Newsnight, Paul Mason (13/5/10)
Policy breakdown for Lib Dem-Conservative coalition BBC News, James Landale (12/5/10)
Savings cuts to ‘hit middle class families’ BBC News, Keith Doyle (15/5/10)
Inflation Report, May 2010 Bank of England (click on Watch Webcast) (12/5/10)

Documents and data
Coalition Agreement published (see here for text of agreement) Conservative Party (11/5/10)
Conservative – Liberal Democrat coalition negotiations agreements Liberal Democrats (11/5/10)
Inflation Report, May 2010 (portal) Bank of England, see in particular:

Articles
Department by department, what the new Government plans to do Independent (13/5/10)
VAT rise looms as coalition deal adds estimated £10bn to debt Guardian, Katie Allen and Julia Kollewe (13/5/10)
Some initial reaction to the Tory / Lib Dem coalition agreement Institute for Fiscal Studies Press Release, Robert Chote and Mike Brewery (12/5/10)
Tax rises likely under coalition government, says Institute for Fiscal Studies Telegraph, Edmund Conway (13/5/10)
Give and take BBC News blogs, Stephanomics, Stephanie Flanders (12/5/10)

Questions

  1. What ground has been given by (a) the Conservatives; (b) the Liberal Democrats in terms of their proposed economic policies (see Looking at the manifestos for details of their proposed policies).
  2. What will be the implications of a £6bn cut in government spending on aggregate demand? What other determinants of aggregate demand need to be taken into account in order to assess the likely growth in GDP over the coming months?
  3. What are the distributional consequences of (a) a rise in the personal income tax allowance to £10,000; (b) a rise in VAT?
  4. Has there been a major change in fiscal policy?
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A mini-me Budget – the end of the 10p tax rate

In the face of a Labour backbench rebellion over the abolition of the 10p tax rate in the most recent Budget, the Chancellor, Alistair Darling, introduced what has been described as a mini-budget this month. In this mini-budget he significantly increased tax allowances to try to alleviate the impact of the removal of the 10p tax rate on some of the poorest families.

Darling’s solution could prove costly, say economists Guardian (14/5/08)
FAQ: Formula that bought off the Labour rebels Guardian (14/5/08)
Brown risks £2.7bn tax cut to end revolt Guardian (14/5/08)
Mini-budget will put money in pockets of 22 million voters Guardian (13/5/08)
Darling’s statement in full Guardian (13/5/08)
Institute for Fiscal Studies highlights Chancellor’s dilemma after emergency tax cut Times Online (21/5/08)
Q&A on the Government’s ‘Golden Rule’ Times Online (15/5/08)
Basic rate taxpayers to get £120 BBC News Online (13/5/08)
Q&A: Tax changes BBC News Online (13/5/08)
Full statement: Tax changes BBC News Online (13/5/08)

Questions

1. What was the effect of the abolition of the10p tax rate on income distribution (before the min-budget measures)?
2. Assess the extent to which these changes will alleviate the impact of removing the 10p tax rate on the poorest families.
3. Discuss the likely impact of this change in the government’s fiscal stance on the main UK macroeconomic targets.
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Making the poor poorer?

In Gordon Brown’s last budget as Chancellor he scrapped the 10p starting rate of taxation and this change came into effect for the 2008/9 tax year starting April 6th 2008. The move has been criticised by many Labour MPs and by poverty campaign groups as they argue that the scrapping of the rate will make some poor people worse off. They also argue that it will make it more difficult to meet the targets the government has set for reducing child poverty

Chancellor accused of widening poverty trap for poorer workers Times Online (14/03/08)
Benefit move to cut child poverty BBC News Online (12/03/08)

Questions

1. Explain what is meant by the poverty trap.
2. Explain how the abolition of the 10p starting rate of tax is likely to increase inequality.
3. Analyse two policies that are likely to reduce poverty. Then assess the extent to which these policies will also help reduce child poverty.