Could the £291 Granny Tax be Osborne's 10p Tax Rate?

He rushed past it. But it could prove the most significant announcement in his revenue-neutral budget. Pensioners who have seen their incomes slashed by falling annuity rates and poor interest in savings - those who don't rely on the state for all their income - will no longer be given any extra reward for their prudence. Instead their extra tax allowance will be abolished in future in the name of simplicity, and presumably helping to fund the tax cut for high earners.

In 2012/13, a pensioner over 65 has a tax-free allowance of £10,500 compared with £8,105 for other taxpayers. Someone over 75 would have a slightly higher allowance of £10,660. Even with the new tax allowance of £9,205 from April 2013, it still amounts to a loss in the allowance of £1295 for 65-74 year olds and £1455 for the over 75s.

It amounts to a £259 cut for those reaching 65 from next year and a £291 cut in potential income for older pensioners - or £5.50 a week - and Ed Miliband would be wise to focus his outrage here as much as on the new 45% rate.

This new £291 Granny Tax may make the tax system simpler. But it could prove as big a mistake as Gordon Brown's axing of the 10p tax rate, introduced for similar reasons. And just because it doesn't apply to existing over-65s, though their allowances will be frozen, it will adversely impact those who will reach that age in the near future.

They won't be happy, and many of them are Tory voters. £290 may just about buy a decent meal in one of George's ski resort hotels. But it goes a lot further for thrifty pensioners - and they will not thank George for it.

Mobility could be a casualty of regional pay

In today’s Budget, George Osborne confirmed his plans to push through regional pay settlements for the public sector. This is likely to affect not just civil servants, but teachers, nurses and police officers, once current pay freezes have finished.

 

On the face of it, this makes good financial sense. Relative pay between public and private sector workers is much higher in parts of the North than it is in the South East. London already has a weighting payment to reflect higher costs in the capital, so why not have regional pay levels in every region?

But it is not as simple as that. The market for many public sector workers is not a regional one, but a national one, particularly with senior posts like headteachers or senior civil servants. It is already very difficult to move back into London if you have moved to take up a post in the regions. Now it will be harder to move between regions, making it more difficult to match the right people to the right job. This could prove an added complication when trying to rescue failing schools or respond to Ofsted’s tougher inspections, for example, or to persuade more public bodies to move out of London.

In education, there is an added complication. 1600 academies are able to set the their own pay rates, though the majority follow national guidance. They will certainly be in a stronger position to recruit the best talent if they choose to vary from the norm, potentially distorting the market and outweighing any savings from the regional pay cuts where wages are lower. And it does seem odd to be talking about regional pay at the same time as schools are all being encouraged to go it alone.

Of course, there is one group that gains from this move: the teaching unions. They will have the chance to negotiate separate deals for each region and have much more work to do with the school teachers’ review body, so will find they have more to do than ever. But I’m not sure they were the beneficiaries George Osborne really had in mind when he announced the move.

This post also appears at Public Finance. 

A budget chance to promote social mobility

George Osborne's Budget tomorrow has variously been presented as an opportunity to scrap air duty, national insurance and VAT on petrol. But for thousands of young people from less well off families, its most important feature will be what it does about the Education Maintenance Allowance. Until this year, 16-18 year-olds in full time education with family incomes below £30k a year have had a conditional allowance of up to £30 a week, payable provided they attend school or college and intended to enable them to continue studying after GCSEs. The government has announced that there will no further payments, not even for those young people who started two year courses last September. There will instead be a small discretionary fund expected to be worth around £70m (though this is likely to increase after Simon Hughes's review) to replace the £490m distributed by EMA, of which most goes to young people in the poorest families. And while higher education fees have been the main media focus of student protest, the greatest injustice and potential hinderance to student mobility is the abolition of the EMA.

The irony is that its abolition was only made necessary because the Liberal Democrats insisted that their pupil premium should not lead to a reduction in overall school funding, and the Treasury insisted that the Dept for Education must fund it from within its wider budget. But the EMA is far better targeted than a pupil premium that is likely merely to provide sticking plaster for wider school cuts, and which lacks the same degree of conditionality on the recipient. Truanting or tardy EMA recipients can lose their allowance; there is no sanction as yet proposed for schools that show little to justify their premium.

So, tomorrow's Budget offers Osborne an opportunity on two fronts. The first is to restore the EMA for those students with a reasonable expectation of receiving it for 2011-12, those in the second year of A-level courses for example. If Osborne doesn't make this change, the courts almost certainly will. And I would be astonished if DFE lawyers haven't already reached this conclusion: after all, they made clear that university tuition fees could not apply to existing students when they were first introduced in 1998. The second is to introduce a much more comprehensive replacement to the EMA for new statements. Simon Hughes has certainly been arguing for this, as have many FE colleges. There needs to be enough money to cover the costs of transport, books and learning materials for all students with family incomes below the £20k where the full £30 EMA was currently paid.

Ministers make the argument that the EMA did not significantly increase participation, and that with compulsory staying on coming in from 2013 for 17 year-olds and 2015 for 18 year-olds, the scheme has substantial deadweight costs. But EMA has increased participation, especially among 17 year-olds, as the IFS has shown. More importantly, it has a conditionality that is absent from child benefit for young people over 16. And it creates a sense of responsibility in the young person that is crucial in today's mollycoddled times. Looking at the two benefits in the round together with an increased apprenticeship offer could offer a way out of the funding dilemma, but not without some additional resource for the poorest students. After all, what exactly is the point of introducing a pupil premium for under-16s only to remove an important ladder of opportunity when they reach 16. George Osborne has the chance to put things right in his Budget.

Where is the Budget for recovery?

I have written this post for the Public Finance blog on today's Budget:

So much of today’s Budget was pre-trailed – the VAT rise to 20%, the increase in capital gains tax, a public sector pay freeze, lower income tax bills for the lowest paid, eye-watering public sector cuts – that one might have expected to have seen an imaginative approach to economic recovery to compensate. Labour’s argument that the widespread cuts already announced could have a negative effect on jobs and the recovery needed to be answered. And George Osborne failed to provide an adequate response.

A modest cut in corporation tax still leaves UK rates much higher than those in Ireland, a country that has taken even harsher measures in cutting its deficit. There was nothing in the Budget to promote innovation or higher level skills – the ‘technician skills’ that are needed to provide growth and compete with the fast-growing Asian economies. The measures for small firms sounded unappetising, and as complex as in any Gordon Brown Budget. The Tories show no recognition of the interdependence of the private and public sectors, and the effect on small services businesses of big public sector cuts. Scrapping tax relief for the video games industry seems bizarre, and could affect growth in a highly innovative British success story. However, there will be relief that capital investment is not further to be reduced, particularly in schools anxiously awaiting the results of a review into Building Schools for the Future, though the level at which it is being frozen was artificially reduced as a result of forward spending on the stimulus. And there is no indication – as benefits are cut by £11bn – of any replacement for Labour’s youth jobs programmes that were cut last week.

With 25% real terms cuts in unprotected departments, there were no guarantees on education spending, even as health and aid spending were ring-fenced, which will mean a tough summer of negotiation for both the Department for Education and the Department for Business, Innovation and Skills. Osborne did indicate, however, that education and defence would not be treated as harshly as other departments.

Schools will be hoping that the promised pupil premium provides some cushioning, and it will be hard to reduce frontline spending in schools, 16-19 colleges or Sure Start without causing a huge outcry, though the Treasury may argue against real-term rises with a two-year pay freeze and a future increase in staff pension contributions. Universities are likely to have to charge higher fees after the Browne review, and cuts in adult skills spending in colleges are already under way. Other big areas of spending like education maintenance allowances and children’s and youth services face possible deep cuts too.

Politically, George Osborne delivered confidently and Harriet Harman gave a sharp and well-judged response. But it is the Liberal Democrats who look most exposed over the details, particularly the VAT increase after their denunciation of the Tories’ VAT ‘bombshell’ before the election. While they may argue that they achieved some of their income tax and CGT plans – and the removal of the cider levy for their West MPs – voters are unlikely to see these as mitigating the wider impact on public services and the working poor. There were clever touches – pension pledges and an uprating of child credit – but they are unlikely to protect the party from the anger of a significant proportion of their electorate who believe this is not what they thought they were voting for. Talk of an international ‘consensus’ – not shared by Barack Obama in the US – may not be enough to win them back.

Coalition cuts enthusiasm and a lack of a growth strategy

I wouldn't argue against George Osborne's proposition that the public sector deficit is unsustainable. And there is certainly a case for reviewing public sector pensions - John Hutton is a good man for that job - and a pay freeze for public sector workers. Benefits need reform, in the direction that Labour had been moving, shifting the able-bodied from welfare to work (provided there are jobs and business opportunities in the economy). There may even be a need for the Tories to defy their pre-election commitment that there were no plans to do so and increase the general level of VAT (though an extension of the scope of VAT would be hugely regressive and politically very stupid).

However, what is most worrying about the narrative surrounding Tuesday's 'emergency' budget is the complete absence of any growth or jobs strategy, and the total lack of understanding of the interrelationship between the private and public sectors. The freezing of school building projects is crucifying the construction industry. The Nimbyist changes in housing rules will hardly help. The opposition to rail electrification or airport development suggests little understanding about the relationship between transport infrastructure and economic growth. The bizarre package of job cuts this week - including in Sheffield and in youth job programmes - shows a strange set of priorities.

So I share the concerns of those economists who argue that deep cuts without any jobs or growth strategy will depress the economy, depress growth, depress tax revenues and push up unemployment. The relish with which the Tory press has been treating the forthcoming budget has not been corrected by Osborne (despite his protestations of a belief in 'fairness' this morning) and the Liberal Democrats have utterly failed to moderate the Thatcherite enthusiasm that surrounds the whole exercise - Vince Cable has disappeared without trace.

Unless the coalition strikes a proper balance between necessary savings, tax increases and future jobs and growth, it will cause huge problems for the whole country in the future. In that, they are right to argue that we are all in this together.

A very political budget

Alastair Darling has grown greatly in Chancellor, and he was in full command of his brief today. By being able to highlight better than expected tax receipts and lower borrowing, he was on strong ground arguing that the Government's approach to the economy has been showing signs of success. His announcement on a stamp duty holiday for first time buyers up to £250,000 cleverly linked its funding to a higher duty on homes worth over £1 million. He wisely focused a range of new tax reliefs on entrepreneurs, innovation and business investment, with a new national investment bank to support green transport and energy. And he made much of contrasting Labour and Tory approaches to public service guarantees, employment training and high speed rail. His plans to clamp down on tax avoidance in Grenada, Dominica and Belize were a masterstroke, showing a mischievous sense of humour. Given the perceived limits on his room for manouevre, this was a sensible package that put Labour in a stronger position than before. Gordon Brown should make clear that in the still limited chance that he should win the election, he will retain the experienced reassurance of Alastair Darling at the Treasury. Being able to draw a sharp contrast with the woeful George Osborne would be a vote-winner.

Is the tax rise good politics?

There is no doubt that the big story out of the budget politically will not be the huge levels of borrowing or even the Chancellor's optimistic growth forecasts for the coming years. It won't be increased duty on spirits or petrol: that is a given in budgets. Nor will it be the very welcome boosts for pensioners and savers, or the extra child tax credit, let alone the money for colleges I mentioned in the previous posting. All of these things are valuable, and Alastair Darling presented them well.

The story will be around the increased tax on high earners, some of which was announced in the pre-budget report, which means that those over £150k a year lose higher income pension tax relief and pay 50% on earnings above that level from April 2010, and those above £100k have their taxes increased as a result of the removal of their tax-free allowances.

There are three questions to be asked about the strategy. The first is whether it will raise much money. It can reasonably be argued that the extra millions or even billions it does raise each year is financing useful measures such as the extra training for the unemployed or college places. But the same extra revenue could be raised in many other ways without touching basic rate tax.

The second is whether it is fairer. And on that score, it is hard to argue against the changes, as it is being targeted at the top 2% of income earners. The system is certainly more progressive.

But is it good politics - the third and trickiest question? On the one hand, it puts the Tories on the spot, and they have been careful not to announce any repudiation of the measure even though they know they could do so at relatively little financial cost. Doing so would paint them as on the side of the rich, a group that includes traders and bankers whose unpopularity knows no bounds. Moreover, it would hardly fit with their cost-cutting lectures on public services. So, as a 'dividing line' it is probably good politics. And the Tories would be wiser taking Danny Finkelstein's prescient advice on this score than Iain's instant reaction.

However, whether it is good politics for Labour in the long term is another matter. It may well be popular with some of the party's base support and Guardian columnists. But an important part of New Labour's promise and success has been that it would not raise taxation, and until November, the party kept to its promise (albeit with a 1% rise in national insurance). The politics of doing so was not particularly about attracting the very rich to vote Labour: their proportions were always going to be very small and their support smaller. It was more about making Labour attractive to the aspirational middle, business-owning and professional classes, particularly in London and the South East. And while most would never earn more than £100k in 1997 - the level that some wanted at the time - or £150k now, they might aspire to do so.

At a time of recession, it is easier - as Obama has done in America - to justify raising taxes on a better off minority. It is hard for anyone to argue with higher taxes on the highest earners at present and to sound unselfish in doing so. So it may prove initially popular. But the willingness to increase the top rate of tax could make it harder in the future for Labour to build the sort of coalition that kept it in power for three terms. And that may mean that any short term political gain has longer lasting political pain.

This posting has been picked up by Iain Dale and the Observer.

A good budget for colleges

After two almighty cock-ups by the Learning and Skills Council - over the capital funding programme and sixth form places - the Chancellor has done the right thing by colleges and school sixth forms in this budget with announcements of extra revenue and capital. It may not be enough to satisfy the more ambitious college building programmes, but it is a good start, and it is worth remembering that there was no school or college building programme before 1997.

No strings attached

So it was a boring budget, as the minister with a reputation for being a 'safe pair of hands' emerged with his reputation intact. Forgive me as a non-driver if I don't get worked up about showroom taxes on gaz guzzlers; even as a drinker, I doubt that 14p on a bottle will bring an end to my Rioja-drinking habits. So boring was the budget that even the columnists had little interesting to say this morning. But this didn't stop Alice Miles. In the absence of much else to write about, she used her Times column to recall the days when Gordon Brown used to keep budgets secret from the Prime Minister (and much of the cabinet). But she was picked a bad example when she claimed

Mr Brown not only told the ministers the amount they were getting, he would publish a slew of targets telling them what to prioritise, and even directly order them how to spend it - he told David Blunkett, for instance, in March 2000 that the extra £1 billion for schools was to be sent directly to head teachers, bypassing local education authorities.

Not true. In fact, the direct funding was devised by David Blunkett and some of us who worked with him precisely to avoid all of the education spending being tied up in Treasury targets. Brown took a lot of persuading initially, though the 'direct grants' were to become a popular feature of later budgets (and a similar budget was introduced, at Blunkett's behest, for school capital). Indeed it was Brown's and John Prescott's opposition that prevented Tony Blair and Charles Clarke from moving to a national funding formula for schools that would bypass local authorities. And, in 2006, there was a return to form, when the Treasury started to link increases in what became known as the School Standards Grant to poverty indicators. The result has been that the one grant that benefited schools in every part of the country (and every constituency) has lost its simplicity and popularity. As Brown 2008 embraces reform and independence for schools, he should restore the simplicity of this direct funding, and use other resources to target the poorest schools. Better still, he could move to a national formula and funding agency for all secondary schools.