A budget to reward work?

Politicians are always looking to incentivise employment. The general means of accomplishing this is by either cutting taxes on high earners and corporations to encourage entrepreneurship or cutting benefits to get the unemployed off the dole and contributing to GDP and tax revenue. In the run up to today’s third budget of the coalition government Chancellor George Osborne claimed he was planning a “budget to reward work”, i.e. one which will benefit those already in employment and encourage the unemployed to get a job.

Now with the details of the next 12 months of government spending announced we can ask ourselves: to what do degree has he succeeded? There was some welcome news, such as raising the level at which someone in employment begins to pay income tax to £9,205 a year with the aim of raising it to £10,000 next year. Not only will this reduce the tax burden on those with the lowest incomes but all those in employment will pay less tax; the average basic rate tax payer will now be £305 a year better off. This may not sound like a lot but it will boost consumption and aid the economy. Another good idea was tax breaks for firms working in the fields of computer games, animation and high end television manufacture. These are important sectors to the UK economy where we have a competitive advantage and are vital to our growth.

However over the last year those in employment have had their prosperity dogged by the specter of inflation above the Bank of England’s target. Although inflation has fallen back in the last few months (currently the CPI is at 3.4%) higher inflation erodes the value of income made from working and reduces the incentive to enter work. Firms have tended to give lower than inflation pay rises recently so as inflation remains high and those in work are finding themselves worse off. Inflationary pressure is largely the result of rising fuel costs caused by the soaring price of oil and gas on the global market. A domestic fuel subsidy or measures to reduce transport costs could have reduced inflationary pressure and made the income from work more valuable. This, however, was never on the agenda.

Another consideration is where will the funds come from to pay for this tax reduction? Borrowing is projected to be £1bn lower than anticipated which has given the Chancellor room to maneuver. A certain amount of the slack will be taken up by the rise in stamp duty for properties over £2m and the proposed clamp down on tax avoidance. The majority of the additional revenue will be raised by an extra 37p per unit tax on cigarettes. It is worth remembering that taxes on commodities disproportionately affect low earners as they spend a higher proportion of their income on the taxed commodity. A tax break for lower earners could be a double edged sword for those who also smoke – which there is also a higher instance of among the poor.

The other main highlight of the budget was the reduction in the top income tax bracket - from 50p in the pound to 45p – aimed at encouraging entrepreneurship and investment from overseas. I have blogged about this before but investment will remain low and the rate of business start ups will be sluggish while GDP growth is lack luster. With growth in 2012 projected at a mere 0.7%, Osborne should consider a growth strategy if he wishes to stimulate investment and create a fertile environment for new businesses.

Job creation and a plan for boosting growth were not overtly stated in today’s budget. There was protection for some vital areas but others important growth sectors (such as renewable energy) were all but activity discouraged – mainly through the government’s continual commitment to non-renewable energy. Unemployment is projected to hit a peak this year at 8.7% and a clear plan for job creation is needed to protect the recovery. Unemployment and the low growth rate are the biggest problems the UK economy faces right now and the government should commit to a clear strategy for tackling these before it leads to endemic social problems. Such a plan would also send a clear signal to overseas investors and aspiring entrepreneurs that the UK is committed to economic prosperity above political goals.

Overall this is a budget lacking in ambition or a clear plan to boost the economy out of its current dire situation. There were no sweeping cuts, surprise new schemes or massive tax boondocks. Just a few tweaks to the system with the vague goal of stimulating growth and getting more people off benefits and into employment. If Osborne really wanted to create a budget that would reward work he would take measures to reduce inflation or help get more people into work. More employment and a better growth rate would benefit both those in and out of work as it would grow the economy overall. The Coalition maybe attempting to incentivise work but while the economy remains weak, their efforts will be unsuccessful.