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Fuel foolery, merger warnings and Budgetary boons

New Budget makes some sensible changes...and some mad ones too

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Comment What a difference a new government makes, eh? Only parts of the budget are entirely lunatic rather than all of it.

I dealt with the playing around with fuel duty and further taxation on oil companies years ago when it was being proposed by idiot Lefties rather than idiot Tories. That it's someone from supposedly my side of the fence proposing it today makes it no less idiotic.

Setting high prices for something means that we'd like to encourage companies to find more of it and encourage people to use less of it. Lowering tax on fuel and raising tax on profits from finding fuel does the opposite; we really cannot solve a supply shortage by reducing future supply nor reduce demand by reducing taxation upon demand.

The plan to subsidise deposits for first-time home buyers is even more glaringly insane. We've just seen most of the financial system of the western world collapse from the error of lending the money to buy a house to people who cannot afford to buy a house. As a method of digging our way out of this rubble lending more money to more people who cannot afford houses lacks a certain logic to it.

As to the macroeconomics of the budget, the inflation, growth, budget deficit, additions to the national debt: not much can be said really. This is the part of economics that not just you or I, but no one really knows much about. Ninety-nine times out of a hundred, the best prediction you can make about any of these large-scale indicators is that they'll be within 1 or 2 per cent next year of whatever they are this year. Which particular school of economics you belong to, the models you use and even the political party you support doesn't increase accuracy much above this in any direction or for any variable.

Merger warning...

There are, however, three areas that I think fascinating. The first is this mooted merging of national insurance and the income tax system. Historically NI was supposed to pay for the NHS, unemployment benefits and your old age pension. We can quibble about exactly how those should be organised (maybe a little more private, a little less national, in the NHS, but a healthcare system largely financed by taxation seems a worthy enough goal etc) but the notion that there should be, at the very least, a tax-financed welfare safety net is just fine by all – except perhaps for those who get all sweaty over Atlas Shrugged. This has all rather withered away, the link between NI and these things, the only one left is the old age pension, where you must have paid X years of stamp in order to get one.

Even this is now to go, with the pension being paid to all who are citizens of the appropriate age. There seems to be no reason to have the two taxes upon income separate any more: so, the idea to merge the two.

Well, actually, there is in fact a reason why you wouldn't want to merge the two. An entirely political one. If people are paying two separate taxes, then some/all of them will think that they're not quite the same thing. That income tax isn't really 32, 33 per cent as its starting point. Thus tax levels can be higher than they could be with only that one merged tax. And thus, if you're a low tax, small state kinda guy (as Osborne is said to be and as I certainly am) then you'd like the merger because it brings home to people quite how much they are paying. And if you're a large state, high tax kind of person, you'll be against the merger for exactly the same reason.

This has actually been pushed out to consultation, which is a good thing: for so far the debate has been about merging income tax and employees' NI. However, there is also another tax there, employers' NI. The general assumption that most make is that this really is paid by the employers: The general assumption made by most economists is that it is paid by the employees.*

So our starting rate of income tax is not the 20 per cent most think it is, nor even the 32 per cent of the mooted merged system, but over 40 per cent when the three taxes are added together. And the top tax rate isn't 50 per cent, it's more like 62 per cent (employers' NI is as a percentage of pre-income tax and employees' NI gross wages, meaning that you cannot just add the three rates to get a total).

From a Tory, economic liberal, point of view, merging all three would put something of a stop to the cries that this is a low tax country at least as far as incomes are concerned. Which is why I rather expect to see some pushback on this from the left side of the aisle.

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