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UK budget conundrum: can government help the rich and the poor?
LONDON (AP) ' Fifty pence doesn't buy you very much in austerity-hit Britain ' except for a great deal of attention and heated argument.
This Wednesday, George Osborne, the U.K.'s finance minister, will unveil his budget, the annual update of the state of the country's economy and the coalition government's plans for tax and spending for the year. This time round, attention has focused on what Osborne is going to do with the "50p" tax ' political shorthand for the 50 percent top-rate income tax rate ' on annual income above 150,000 pounds ($238,000).
Osborne is widely expected to announce a reduction, thereby casting doubt on the argument pushed by Conservative Prime Minister David Cameron and his finance minister that everyone in the U.K. is feeling the pain of austerity and that "we're all in this together".
In Britain, middle- and lower-income families have been feeling the pinch since the financial crisis hit the U.K. in 2008 and the higher spending of the preceding Labour government sparked a series of stiff austerity measures. Real incomes have fallen since then while unemployment has hit a 17-year high. Inflation, currently 3.4 percent, peaked at 5.2 percent last year while income growth bobbed along at 2 percent or less. Household spending has been further crippled by above-inflation rises in fuel and energy prices.
Britain's economy grew less than 1 percent last year, and isn't expected to do much better this year. Osborne is on course to finish the current fiscal year at the end of the month with a deficit of 122 billion pounds ($193 billion), compared to 145 billion pounds the year before. Borrowing peaked at 151.7 billion pounds in 2009-2010, the last year of Gordon Brown's Labour government.
Public sector debt, excluding temporary financial interventions, was 779 billion pounds when Cameron took office in May 2010, following two years of heavy spending as the nation slid into its deepest recession since World War II. Debt has now climbed past the trillion pound mark.
Osborne's budget options are hemmed in by his commitment to cutting annual deficits, by the slow growth of the economy, the demands of the government's centrist coalition partner and ratings agency skepticism about whether Britain can keep its cherished triple A credit rating.
"The idea that George Osborne is saying the No. 1 priority is to cut taxes on salaries of 150,000 pounds, they can't be serious," Ed Balls, who speaks for the Labour Party on budget issues, said over the weekend.
The 50p rate, announced by the former Labour government as an emergency measure in 2008 to tackling its spiralling deficit and implemented in the 2010-2011 tax year, was accompanied by the removal of some tax benefits for high income earners.
According to the independent think tank the Institute for Fiscal Studies, just 1 percent of U.K. income taxpayers earn enough to pay the 50p rate. Those same taxpayers receive 12.6 percent of taxable income in Britain, and pay nearly 28 percent of total income tax. The burden of the 50p rate falls most heavily on the 43,000 people who earn more than 500,000 pounds a year.
U.K. employers' organization the Confederation of British Industry wants the 50p rate abolished "as soon as public finances allow" and argues that it discourages entrepreneurs and forces businesses to pay higher salaries to lure talent from lower tax countries.
Some Conservative legislators, meanwhile, see the high rate as a symptom of Labour distrust of entrepreneurs. However, lavishly paid bank executives have killed any hope of public sympathy by continuing to rake in huge bonuses.
Not surprisingly, a tax for rich people is proving popular with the less wealthy. A poll published by The Guardian newspaper on Tuesday found that 67 percent of respondents wanted to keep the 50p tax, and that included 65 percent of those people who vote Conservative.
The telephone poll of 1,000 randomly selected adults was done by ICM Research on March 16-18, and had a margin of error of about 3 percentage points.
Among developed countries, Britain's top rate was matched last year by Austria, Japan and Portugal; and exceeded by the Netherlands at 52 percent, Denmark 52.2 percent, Belgium 53.7 percent, Sweden 56.6 percent and Israel 57 percent, according to the Organization for Economic Cooperation and Development.
If Osborne does unveil a cut, it would stand at odds with U.S. President Barack Obama who is considering plans to impose a higher tax on the wealthiest citizens in the U.S. The debate over the U.S. tax ' the so-called Buffett Rule ' was sparked by the billionaire investor Warren Buffett, who continues to call for tax reforms and a higher tax rate for his fellow wealthy investors.
The Conservative's coalition partners, the Liberal Democrats, are demanding that any cut in the top income tax rate be offset by measures to hit the wealthy some other way, perhaps through a "mansion tax" on expensive homes or a reduction in tax relief on pensions. Osborne said in a television appearance on Sunday that the budget would include measures to stop the use of offshore vehicles to dodge the tax on home purchases, a tactic reportedly used by rock stars and wealthy foreigners.
Osborne is keen to deflect attention away from the debate over the 50 pence tax and on Sunday insisted that this week's budget would be geared to helping working people on low and middle incomes. "That is our priority," he said.
He is expected to announce an increase in the so-called personal allowance, the amount of income exempt from taxation. The change would have the greatest impact at the lower end of the income scale.
Given the constraints Osborne faces, analysts at Barclays Capital expect the budget to offer "nothing more than a modest rearrangement of the fiscal furniture."
The debate surrounding the 50p rate is missing one vital component: the amount of money the tax has raised. The government's tax and revenue office has done an analysis, but Osborne will keep that total secret until Wednesday when he finally comes clean on his plans for the contentious charge.