Wednesday, 22 April 2009

Budget 2009

Budget day and there are some key headlines:

1. Top rate of income tax to be 50%
2. £2000 incentive to scrap 10 year old cars
3. Borrowing to hit £175bn
4. Return of the fuel escalator
5. Changes to ISAs and pensions
6. Lots of other changes

I'll address each in turn below:

50% income tax - In 1988, Nigel Lawson (now Lord Lawson) cut the top rate of income tax to 40%. New Labour have always mentioned in campaigns that they wouldn't increase the top rate of tax. Last November, however, Alistair Darling announced a new top rate of tax for people earning over £150k per annum. This was to be 45% and to take effect in April 2011. It is this tax that has risen, and been brought forward. Now it will be 50% from April 2010. Several other adjustments, to minimise deductions for high earners mean that anyone earning in 6 figures will lose (however this is not many people).

Scrapping incentive - This is not a £2000 subsidy, as implied. Nor should it be confused with the £5000 incentive to buy green cars from 2011, that was announced last week. The government will only put up £1000, with the rest coming from the automobile industry, and will only apply to new cars. So not as generous as it sounded.

Borrowing - The largest peacetime deficit ever, even as a percentage of GDP. In fact only the Second World War sent the budget deficit higher. What is more, 2010/11 will be almost as bad as 2009/10. Over the 5 years whose deficits were announced a whopping £703bn. Which is more than a few. Realistically, the interest on that debt (given yields of 4% over the long term) amounts to £28bn per year forever, unless of course surpluses are run for the forseeable future (recent events have shown that period to be nil, but I speak figuratively). I still think this is the right thing to do, although I'd plan for lesser deficits in 2012-15 than Darling does. Having said that, it won't realistically be Labour in charge by then, so it is someone else's decsion to make.

Fuel escalator - 2p per litre come September, then 1p per litre ABOVE INFLATION every April for the next 5 years, subject to "keeping an eye on fuel prices". Empty promise of green policy, in other words.

ISAs - currently the allowance is £7,200, of which only £3,600 can go into a cash ISA (cash ISAs are lower-risk and lower-reward, except when things go like they have recently). These limits will be increased to £10,200 and £5,100 from next year (unless you are aged over 50, in which case they increase come October - if you turn 50 this winter, your allowance increases on your birthday). This will encourage saving, at a time when people were increasing their savings anyway. At some point I may explain in detail my view on taxing savings interest, but in principle I oppose it, so welcome this increased allowance.

Pensions - For the so-called super-rich, pension credits have been cut. If you earn over £100k you will face a higher marginal tax rate, until your average pension credit drops to 20%, where it remains (rather than the 40% it used to be, and remains for incomes in the £40-100k range).

Other - ask the Beeb. It has a personal budget calculator. Apparently I'll be slightly better off, although that comes mostly from increases in the allowances in line with inflation.

Market response: FTSE up 1%, pound down 1.1% against the dollar and 1.7% against the Euro. That implies that "the markets" believe Darling is doing the right thing, but that those debts must be paid for somehow (hence the drop in the £s value). Most importantly those changes are no greater in scale than usual daily changes, so the Budget was in line with expectations.

Final note: This blog will now focus on Economics. All new F1 related posts can be found on my new blog, the power of 15000 horses.

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