The new UK government will do things differently, it promises. It has started on its journey by changing the taxation and spending policies. Poorer people may get a tax cut, while those who are better-off will pay more.
A pledge in the Liberal Democrat manifesto was to raise the income tax personal allowance, so that people earning under £10,000 a year would pay no income tax at all. This will not be implemented immediately, but an agreement with the Conservatives specifies “that the personal allowance for income tax should be increased in order to help lower and middle income earners….. [starting with] a substantial increase in the personal allowance from April 2011, with the benefits focused on those with lower and middle incomes”.
In the environment of a crisis in public finance, this tax cut will be financed by tax rises elsewhere, including a 1% increase in employee National Insurance for people earning between £20,000 and £35,000. Abolishing this tax rise planned by the last government had been a centre-piece of the Conservative Party campaign. But now only the rise in employer contribution will be cancelled. The Conservative’s plan to raise the Inheritance Tax threshold from £325,000 to £1 million has also been abandoned for the time being.
Investors will also be unhappy that the rate of Capital Gains Tax on investments is expected to rise from the current 18% to a rate at, or closer to, the income tax rate – probably at a top rate of 40%, which is the income tax rate for people earning over £37,400, but under £150,000. The top 50% income tax rate may be maintained for the present, but is unlikely to be used for capital gains. People in Northern Ireland will be particularly affected by another tax rise – the replacement of air passenger duty with a per plane tax, which is expected to raise higher revenues.
Retirement delayed
Retirement plans may also be affected. The new government will review the state pension age, saying the pensionable age will rise to 66, but not before 2016 for men and 2020 for women. It will rise further in following years. There will also be a phasing-out of the default retirement age and, more controversially, an end to the obligation on pensioners to opt for an annuity by age 75.
The two parties’ agreement specifies that compensation will be paid to Equitable Life policyholders who lost out because of regulatory failure. There was no mention of savers in the Presbyterian Mutual Society being treated similarly: neither the Treasury nor departments here could say when asked whether they would be treated in the same way. (The £50m hardship fund for PMS savers announced by the NI Executive in April is unaffected by the change in government.)
State benefits are likely to be cut. The various welfare-to-work programmes will be replaced by one new programme, which will be tougher. Anyone who cannot demonstrate their willingness to work may lose benefits – refusing a job offer may cause benefits to end.
Child benefits and child trust fund may be removed from higher earners – though this may only become clear in the emergency Budget expected in summer. The minister in charge of welfare reform is Iain Duncan Smith, who set-up the Centre for Social Justice think-tank. It has argued that claimants must be allowed to keep more of their benefits when they move into work and Duncan Smith may seek to implement this change.
Northern Ireland’s pain
Given that several of these initiatives will cost money, other tax rises seem inevitable. It is widely assumed that this will include VAT rising to 20%, or perhaps more. This would have a particularly strong negative effect in Northern Ireland, greatly reducing cross-border trade.
Northern Ireland could be squeezed in other ways, with the likely reduction in block grant from the Treasury. This makes it much more likely that water charges, deferred until now, will be introduced. The notional average water charge set by the regulator for this year was £395 – though, says a spokeswoman for the Department for Regional Development, had the charges actually been implemented ministers would probably have reduced this by £160 to reflect the contribution towards water and sewerage costs paid for through the regional rate.
Other spending reductions might include public sector job losses, the closure of some local public sector offices and pay cuts – as have been carried out in the Republic. One local economist also suggested that welfare payments might be linked to the regional cost of living – cutting benefits rates in Northern Ireland.
Even these cuts would probably not be enough to make much impact on the public finance deficit. Other tax increases and spending cuts are very likely.
A Question of Money
Q. Can I do without my credit card?
A. Increasing numbers of people seem to be doing so. While spending on plastic is rising, most of this is now via debit cards. Credit cards remain popular, but come with risks of spending more than you can afford and overlooking the due date for paying your bill. Using a debit card helps with budgeting. One good reason to use a credit card is that it provides a guarantee: the card issuer becomes jointly liable for the supplier of goods and services worth over £100. But Visa also applies this guarantee (Maestro does not) on its debit cards. There is also the old option of using cash, but this is proving increasingly unpopular with both banks and their customers. If banks have their way, small value transactions will be conducted using either contactless ‘electronic purses’ (plastic cards topped-up from a bank account), or mobile phones that double-up as payment devices. One way or another, paying by plastic will stay with us for the foreseeable future, but you should be able to survive without a credit card.