24th March 2011
After having some more time to digest the UK Budget which was published yesterday I would like to add to the initial thoughts I put online.
Now care is needed as sometimes important matters are hidden in the detail but here they are:
1. There are some hidden future tax rises from this section of the speech as this is announced to take place from April 2012.
In the last Budget, I announced that from next month welfare payments and public service pensions would be up-rated in line with the Consumer Prices Index (CPI).
I said at the time we should also consider up-rating the tax system in the same way. So from April 2012, the default indexation assumption for direct taxes will move to CPI.
As they used to be uprated by the usually higher Retail Prices Index or RPI we can see that this means a reduction in the inflation-linking of UK tax allowances as time goes by.
For example RPI is now 5.5% and CPI is 4.4% so the difference right now is 1.1%.
Now the difference is by no means static but over time I expect the influence of this to build up and lead to lower allowances for direct taxes in real or inflation-adjusted terms.
This is different to the increases in the personal allowance at the bottom of the income scale.
Overnight I have thought more about this area and I would also like to draw you attention to this quote from the Budget speech.
"As announced by my predecessor, tobacco duty rates will increase by 2 per cent above inflation…..Rates of vehicle excise duty will increase by inflation only."
You may notice that it appears to have slipped the Chancellor's mind to point out that he is using Retail Price Inflation here and not CPI.
If you re-read the paragraph above you will be reminded of the differences between the two indices and the Chancellor's intention here is to have things which benefit him and raise revenue rising at the usually higher RPI whilst expenditure in terms of pensions and now allowances to taxpayers only rise at the usually lower CPI.
This sleight of hand is at best sneaky and at worse disengenuous. Plainly using two different inflation rates has no logic and choosing them to suit yourself the most is in some ways rather insulting to the public as he is plainly hoping that it will be regarded as arcane and complex.
Over time the impact of this ruse will build up and become very significant.
It is not possible to be precise about the cost because the gap between CPI and RPI is variable rather than a constant.
When the original documents for switching from RPI to CPI as an inflation target were published I remember that at that time an annual difference of 0.7% per annum was estimated.
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