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Budget 2002 - The juggler has done it again. A bit more for
the poor, a lot more for public services, but not much pain for the rich. By Donald
Hirsch
For five years, Gordon Brown has been performing an impressive juggling act
in reconciling ambitious tax and spend objectives, without deviating from his
self-imposed rules on borrowing. The three main balls he has kept in the air
are redistribution, rising spending (on key services) and reassuring Middle
England on tax. In his latest Budget, the third ball wobbled but, contrary to
every pundit's forecast, did not fall. In the circumstances - possibly the
least favourable economic circumstances that Brown will face - this was yet
another bravura performance for our conjuring Chancellor.
Of the three balls he keeps aloft, redistribution is the least talked about,
but the most radical. In Budget after Budget, the Chancellor's largesse has
landed primarily in the laps of the worst off - particularly those of poorer
parents and pensioners. This Budget was no exception.
Many of the multitude of tax credits had already been announced and represented
no extra cash (beyond inflation) that we did not know about, but the momentum
of growth in these benefits was largely maintained. But two particular
announcements stood out. One was that in the merger of benefits and tax
credits for children next year, into the Child Tax Credit, child allowances
for out-of-work parents are being levelled up to those for working families.
Another was the proposal to index these entitlements to earnings rather than
prices for the remainder of the parliament. Like pensioners, families with
children are now having their minimum incomes locked into rising prosperity,
having fallen scandalously behind during the increases of the 1980s.
Unusually, though, Brown's timing was spectacularly bad. Six days before the
Budget, the government published the first real data showing how much of a
dent all of its redistribution has made on poverty. The figures were
revealing. On their own, Budget measures would have reduced the four million
children in poverty by well over a million. Yet only half a million have in
practice escaped relatively low incomes, not least because rising living
standards create a moving target against which poverty is measured.
This is absolutely not a sign that the government has failed in its war on
poverty. In fact, for the first time in a generation, the poor have gained
slightly more than the rest of the population during a period of rapidly
rising prosperity. More often in recent times, the fruits of the good times
have gone to the rich and the brunt of hard times has fallen on the poor. The
continuation of redistributive policies in this year's tougher Budget was
promising. One thing the government ought to have learnt from its first term
is to avoid extravagant targets - abolishing child poverty over 20 years is
looking less attainable as each year passes - and rather show its commitment
by keeping things moving steadily in the right direction.
In juggling the second ball, spending on public services, a sustained
commitment is even more important: despite first-term rises averaging 5 per
cent in health spending, the public has yet to notice a dramatic improvement.
Brown rose to that challenge in this Budget, increasing the commitment to 7.4
per cent a year in real terms over the next six years, audaciously assuming
(to Tory fury) that his party will still be in power at that time. And
education also got a guarantee that it would receive a rising share of
national income in this parliament.
It is hardly surprising that, to afford all this in a slowing economy, Brown's
third main task of reassuring the middle classes has been trickier this year.
But while rises in direct taxes marked a significant departure, they were
hardly the return of tooth-and-claw socialism that some had predicted.
The most significant change was to put a penny on the national insurance
contribution rate. This was a modest swipe rather than a kick in the teeth to
Middle England: its effect was roughly to take back the nice little handout
of a 1p cut in income tax that was brought in three years ago. A bigger hit,
wrongly forecast by the pundits, would have affected a group that they, also
wrongly, referred to as "middle England": those earning £30-35,000
a year. They would have suffered most had the upper limit on national insurance
(£30,000) been raised to the point where higher-rate tax kicks in (£35,000).
All the sob stories about this hard-pressed bunch and dire warnings of
electoral fallout failed to take account of the fact that, of 21 million
basic-rate taxpayers, only the richest million or so earn this much. As shown
by the graph, the biggest concentration of voters earn £20,000 a year or
less. Perhaps all the interviews with disgruntled men driving Mondeos through
Essex helped let them off this time.
What really matters for the better off is that the 1 per cent extra on
national insurance contributions applies to all income, including that
above the upper limit. This has roughly the same effect as raising the higher
rate of tax from 40 to 41 per cent, making a rather modest imposition on the
means of the 15 per cent of taxpayers best able to afford it. Soaking the
rich has certainly come a long way since Denis Healey's 98 per cent marginal
rate on investment income and even since the 50 per cent top rate proposed by
John Smith in 1992. In fact, they got a considerably wetter soaking from the
steady removal of mortgage tax relief during the 1990s, a task completed by
Labour, but initiated by one Kenneth Clarke.
The modesty of these measures did not stop Brown from going out of his way to
appease middle-class and, indeed, rich Britain in other ways. The one social
measure he decided to highlight at the start of his speech was that all
families with children earning up to £58,000 would be eligible for the new
Child Tax Credit. The income thresholds for receiving help with childcare
costs has risen so that a family with two children can still get up to £50 a
week when they jointly earn £35,000. More out of character for Brown was the
decision to freeze the income thresholds for paying tax and national
insurance, so that as incomes rise, the tax burden will go up - a measure
that disproportionately hits the poor.
Even as accomplished a juggler as Gordon Brown will not be able to keep up
this act for ever. What he has done now is to buy time. Eventually, the
cumulative effects of tax rises such as those announced in this Budget will
start to hurt. The big gamble is that by then, finally, the billions poured
into public services will have improved their performance so much that even a
sceptical media and public will rejoice.
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