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Politics & Law Series: Expert Comment

ANALYSIS: Summer Budget 2015

Experts from City react to George Osborne's July Budget speech


Non-dom crackdown

Ronen Palan, Professor of International Politics: “If the world was a theatre, wrote David Calleo many years back, then the Kennedy administration must count as a great success. The same could be said of George Osborne’s fiscal policy. During his tenure as Chancellor of the Exchequer, Osborne has exhibited a genuine knack for theatrical gestures and big announcements, carefully avoiding implementing fiscal policies that would make much of a difference to the rich and powerful in British society.

“This is not to say that I do not support the removal of the anachronistic non-dom fiscal provisions. I certainly do. But I doubt whether the removal of one provision will make that much of a difference.

Would it matter substantially? I am very doubtful

“Dating back to the Napoleonic wars, the non-domicile status – or in short, non-dom – allowed those UK citizens and residents who were born in a different country to avoid paying tax on their non-UK income. The law applies also to their children.

“Non-dom status has undergone changes since 2008, after which, non-doms pay a flat tax of between £30,000 and £90,000 annually on their worldwide income. Predictably, the provision has benefitted only the very rich.

“Considering that the latest census of UK citizens found that about 13 per cent were born in a different country, adding their children and other persons on temporary or permanent visas would bring the number of potential non-dom UK residents to about 20 per cent of the population, or about 12 million people. In reality, only slightly more than 100,000 have declared themselves as non-doms, with less than 1 per cent of the potential population of non-doms choosing to take advantage of the provision and preferring to pay the flat fee rather than UK income tax.

“Removing the permanent provision is a typical halfway house. Osborne has responded up to a point to the challenge thrown by Ed Miliband who promised to abolish the provision. But by going only after the most obnoxious aspect of the non-dom status, he sends a subtle message to a constituency of the rich and powerful – only a Tory government will protect your interests.

“Would it matter substantially? I am very doubtful. No one believes that domiciled wealthy British residents are at a great disadvantage vis-à-vis the non-dom, or that wealthy people residing in other countries are not able to avoid paying tax. There are great many ways by which the rich and the powerful are able to avoid paying tax, and the non-dom provision has clearly proved convenient but is never thought to be a crucial provision.

“The political message that Osborne is sending is not about tax, but about protecting Britain’s reputation as a welcoming country to the wealthy of the world.”

Working age benefits and national living wage

Chris Rowley, Professor of Human Resource Management at Cass Business School: “Of course, one person’s ‘savings’ and ‘caps’ are another’s ‘cuts’. So, we are often presented with ‘savings’ or ‘caps’ on benefits and tax credits and ‘cuts’ in tax. In terms of this we have just had some eye-catching announcements, including not only a reduced maximum household benefit cap, but especially a two-child tax credit cap. This has hints of an China-like child-limitation policy or even economic eugenics . Another one is the new ‘national living wage’ of £9 per hour by 2020.

All of this does not bode well for working families and boosting women in the workforce

"This is for those 25 years old or over and will be £7.20 from April 2016, which this represents a 11 per cent rise on the current £6.50. However, while good in the Orkneys, I am not sure about London and the South East. Also, what about those under 25 and the national minimum wage where the hourly rate for apprentices is just £2.73 and £3.79 for 16-17 year olds. There will also be an ‘earn or learn’ youth obligation and cuts to housing benefits for the under 21s. The young seem losers for sure.

“This is part of the debate that has increasingly been coming to the fore that the state should not be subsidising poor and low paying companies, through these benefits and tax credits by topping-up badly paid worker’s incomes. Rather, the government should be encouraging UK PLC onto a better paid and higher productivity footing. Around 20 per cent of Britain’s working population is low paid (OECD), more than in Germany, Japan and Australia. One way to do that is via these wage policies, of course. Even some Conservatives, such as Ian Duncan Smith, imply they want a more interventionist state with the government to ‘incentivise’ companies to increase wages, while others even want the government to force companies to pay higher wages. Ian Duncan Smith felt he got his way, as we saw from his reaction in the House to the new living wage announcement.

“Cuts to tax will help some, but the other changes will hit the young and those in the bottom of income distribution – and they stand to lose more than they get back in tax cuts. In addition, upcoming changes to childcare support for working families in the Autumn, moving from ‘employer-provided vouchers’ to ‘tax-free childcare’ systems, may well impact detrimentally on the lower paid, one-parent families and those not in work.

“All of this does not bode well for working families and boosting women in the workforce. While the number of women with dependent children in the workplace has increased by one-fifth (800,000) since the mid-1990s to 5.3m (ONS, 2013), many went into jobs that are part time in poorly paid sectors.”

Growth forecast, minimum wage, 40p tax threshold and insurance premium tax

Michael Ben-Gad, Professor of Economics: “There was a lot of talk about higher growth, but in fact the revisions to the growth forecast when compared to March are small.

“With the substantial increase in the minimum wage, the people most affected will be outside the Southeast. The Chancellor is betting on the economy continuing to expand. If there is any slowdown, perhaps because of problems in China or the Eurozone, they will come to regret this commitment, particularly as it will induce higher unemployment, particularly in those parts of the UK (particularly outside the Southeast) where productivity is relatively low.

“The income threshold for the 40p tax rate was meant to start increasing over the next few years and now it will start to increase just a bit faster than originally planned. Even after factoring in the rise in personal allowances, until last year it has actually declined, not only in real but even in nominal terms. In the past, the Chancellor made the gaffe of trying to explain how the extra people swept into the high tax bands benefited by feeling more successful.

“Hardly noticed in the coverage is that the largest component in the £47 billion increase in taxes comes from the rise in the insurance premium tax, which will rise from 6 per cent to 9.5 per cent and raise £8.1 billion over the course of the parliament.”

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