The UK Budget

 

WEEKLY COMMENT 9-07-2015

By Barry Edwards

The UK Budget

 

The clear direction of this budget is to reduce the government’s payment of tax credits and increase the salary cost of the corporate sector. The principle that companies should bear the major portion of their salary costs is a reasonable and fair policy to implement over the period of this government. Unfortunately it will increase expenditure for some SME’s at a time when they are just beginning to recover fully from the effects of the great recession and finance is still very tight for many in this sector.

However, the main thrust of this policy is to increase living standards and gradually remove government and the welfare system away from being involved in making up low pay to a living wage. The bulk of this cost will fall on large companies that have traditionally paid low wages which will eventually increase the cost of living as it is implemented. While inflation is at these low levels this should not have a big impact on the economy and it may well have been planned since these advantageous conditions do apply.

Undertaking this kind of change does have some risk if the economy does not grow as planned but that does not look very likely at the moment. There may be some hardship for the low paid along the way until the ‘living wage’ kicks in fully but the shortage of labour that is anticipated is expected to raise salary levels to mitigate this possibility. No doubt, as the figures are analysed more thoroughly we will have more comment on this fundamental change.

The other main strategy of the budget is to reduce taxation as the economy grows and extricate government involvement from all activities that can be accomplished by the private sector. Shrinking the size of government as a proportion of Gross Domestic Product (GDP) from 40.7% now to 36.3% in 2020/21 and further privatisation will help to achieve this ambition.

If you would like to look through the complete details (The Red Book), click on the link below. It is easy to read and you can go straight to the sections that interest you;

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/443232/50325_Summer_Budget_15_Web_Accessible.pdf

Overall, the budget was well received and much of the policy was already outlined in the Conservative manifesto prior to the general election. There is definitely an air of confidence about the future growth of the economy and many people are starting to invest and commit to spending. The surprise result of the election and the increase in salaries with low inflation has made that real difference that is now clear to see. This has been the one important factor that has been missing and everyone can sense that there is opportunity for those that are willing make the effort to take advantage of this new business environment.

Providing none of the world problems in Greece, Russia, the Middle East and China get out of hand this attitude should prevail allowing most people to control their own future prospects with much more certainty. At the time of writing the situation in Greece looks more promising and it seems that both sides want to do a deal. The pressure from world leaders is increasing on the EU to keep Greece in the Eurozone since the contagion that could occur if the country is not supported is unknown; a risk none of them really want to take.

The net result of the budget changes is an increase in tax payable mainly by the better off and the purpose is to even out the tax anomalies that exist in the system. The government has expressed great interest in simplifying the whole structure of the tax system by reducing the percentage payable and removing many of the allowances that make it so complicated. There are so many areas in the tax system that have been introduced to catch a few big avoidance schemes which filters down to the higher rate tax payers confusing many people.

The principle that a low taxed economy without a vast array of allowances is much more efficient and acts as an incentive for various activities is still a strong argument. Many people are put off doing many things because the system is so complex which they would be encouraged to do if it was straightforward. Many economists believe that more tax is collected if the tax system is very clear and there are many examples to show that this does really work in practice. Admittedly, where tax is low it occurs in small economies or tax havens and it has never been tried in a large developed country with a diverse range of living standards.

This government is implying that it would like to move in that direction and many people would be supportive if they came forward with a new structure for the tax system. It could make the UK very competitive but it is difficult to do if the country remains a member of the EU. This could well be a discussion point when the EU referendum approaches and a proposal to become a low tax country could influence many people who are undecided at the moment.

That’s all for this week, more observations next week.