Office for Budget Responsibility predicts fall in capital gains tax receipts with higher rate

The capital gains tax paid this year will reflect transactions at the old rate prior to the hike from this government. The OBR forecasts £3.2 billion in receipts. For 2012-13, when the new higher rate system will be bedded down, they forecast just £2.9 billion, a fall of a tenth. They seem to agree with those of us who have been arguing that you will raise less if you hike the rate too much.

The OBR also forecasts a weak year for Stamp duty land tax in 2011-12, another tax which has been increased sharply in recent years. They think revenue will fall from £6 billion to £ 5.8 billion. The Treasury needs to do more work on how lower rates of tax can promote more growth  and higher revenues.

The Budget has changed some of the numbers of the five year plan. Spending goes up a bit more – £93.7 billion extra  in Year 5 compared with the last Labour year for total current spending, and  £74.9 billion extra total spending including capital, where there are cuts.

Total borrowing will be £165.5 billion in 2010-11, and £167.4 billion in 2011-12. £261.6 billion of this is additional borrowing for extra spending. Much of the rest is refinancing of maturing debt. There will be  no shortage of government bonds around for several years. The Chancellor’s budget adds £44 billion more  to the national debt by 2014-15, taking the total increase in debt over the five years of the strategy to £485 billion.  

According to the OBR interest rates will rise to 4% by 2014-15. Gilt values will fall as yields rise from an average 3.6% to 4.9% on their view.

All those arguing that the Chancellor is cutting the deficit too quickly, and those who mistakenly think he will be “paying the debt down”  should read these numbers. We are deep in debt, and will adding to the debt substantially. In order to keep interest rates down to realistic levels it is important we are seen to be curbing the deficit, slowing the rate of growth of the total debt.

Our UK national  house is fully mortgaged, but we are taking out a second mortgage to pay the bills and keep up the spending. If we sought an even larger second  mortgage  the international bank managers might well  call time on us as they have on Greece, Ireland and Portugal.

The main change in the budget is the increase in public spending which was not flagged in the speech. The figures for extra spending are:

2011-12   increase of £10.6 billion

2012-13  increase of £9.2 billion

2013-14  increase of £8.1 billion

2014-15  increase of £6.1 billion

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26 Comments

  1. lifelogic
    Posted March 24, 2011 at 7:14 am | Permalink

    It is quite clear from many sensible studies and history that lower tax rates produce more tax receipts. This can already be seen from the non dom tax and the lower numbers of non doms since the tax was introduced. The 40% and 50% (or 42 and 52 with NI) are again far to high to maximise revenue. People will retire, take more leisure, do cash in hand, use contrived tax schemes, work abroad, non come to the UK, do DIY rather than employing professional, not move house or investments too save tax.

    The UK is at particular risk in finance as these jobs are very mobile many have gone to Switzerland, Hong Kong and tax havens already.

    It is insane to have rates higher than those that maximise revenues. In fact they should be lower than even those in order to encourage growth and thus future tax revenues.

    Growth will follow lower taxes (and lower and more efficient well directed government spending) it will non just arise as if by magic.

    Perhaps the most depressing thing is reading all the absurd gender impact statements, and other nonsense statement they now have to include and the references to EU approvals needed to do much of what is needed.

    Things such as “this will affect men more as more men than woman sell valuable businesses and pay CGT and higher rates”. Yes but do they not usually use the money for their families or die and pass it on? If you sell a business for a few million you cannot eat and drink it all yourself unless you try very hard. Other impact statements then, usually under estimate, the high and usually pointless costs of compliance for business.

    A depressing budget, good for non UK growth, poor tax revenues and a Labour government soon.

    EIS and R&D changes pretty much the only positives.

    • Bazman
      Posted March 24, 2011 at 4:20 pm | Permalink

      Here’s the plan. We go to the pub and get wrecked.
      Do you wonder why the pubs are closing Lifelogic? I suppose you think it’s obvious?
      The average pint of beer now costs £3.12. A packet of cheap fags, the thick end of seven quid if you volunteer to pay tax on tailor made in the pub.
      If you go to the supermarket then you can get 30 cans of lager for £16 which is about 35 pence a pint. A bottle of vodka can be had for £13. Peanuts are a steal and easier to steal as they are not behind the bar. Fags are a lot cheaper.
      Seventeen quid plus for three pints and and a packet of smokes in a pub?
      What the government needs to do is cut the tax on pubs to less than the supermarkets and hey presto! The pub trade is saved and everyone can go to the pub. At least by your ‘logic’..

  2. English Pensioner
    Posted March 24, 2011 at 7:39 am | Permalink

    It’s quite simple.
    The higher the tax, the more it is worth putting in some effort to find a way, legal or illegal, to avoid it. And if it gets too high, people just stop bothering to make money in the first place.
    Why governments can’t understand this simple truth is beyond me.

    • lifelogic
      Posted March 24, 2011 at 9:19 am | Permalink

      It is the politics of envy. They do not care if the poor get poorer as a result just so long as the rich are seen to hit.

      A socialist government of envy and sod all the consequences.

      But Osborne has instigated an investigation (something that could be done conclusively in about 12 hours as it has already been done many times) into 52% so he clearly is preparing for a retreat from it.

      A shame it will probably be too late for both him and the Tories it should have happened in May.

    • alan jutson
      Posted March 24, 2011 at 9:27 am | Permalink

      English Pensioner

      Agree entirely, summed up in a simple paragraph.

      If you have a choice, you only need to work hard enough to sustain the standard of living you choose. modern phrase “work life balance”

      With tax rates very high many choose to have a slightly lower standard of living in material things, but in exchange gain more leisure time (non/lower spending) which at the moment is not taxable.

      I have chosen to wind down to retirement (even though it will be financially more difficult) because quite simply it is no longer (in my view) worth trying to run a business (working all hours) with already very low margins which are being squeezed further by increasing costs of overheads, materials, tax, regulation and cheaper imported labour.

      The clue is in the word “balance”.

      • Storm
        Posted April 13, 2011 at 7:10 pm | Permalink

        You’ve hit the ball out the park! Icnerdbile!

  3. wab
    Posted March 24, 2011 at 8:00 am | Permalink

    Although stamp duty land tax receipts are estimated to fall, this does not mean that the tax rates are “too high”. Transactions are down and house prices are down, and maybe that trend is expected to continue, and both of these are probably more relevant to total receipts than people’s reaction to the exact tax rate. If there is one thing you should be complaining about with stamp duty land tax, it is that the rate is absolute rather than marginal, which creates ridiculous anomalies. Why the government allows this stupidity (and unfairness) is something you should press the Treasury about. (They could easily change this and remain tax neutral by adjusting the thresholds and/or rates.)

    And similarly with capital gains receipts. The tax rate is only one factor. For example, actual gains might be expected to be lower because of the economy (so whether or not people cash their gains in). And, as another example, many people might have cashed in their gains last year (so “early”) because they believed that capital gains tax rate would go up. That is a one-off effect. Again, a more important issue with the current system is that there is no indexation, so that even if you just keep pace with inflation the government will claim that you have made capital gains when you have made none. (Even at 2% inflation, after 20 years that is nearly 50%.)

    Reply: There is plenty of evidence that a lower rate of CGT leads to more gains being taken and more tax collected. I also know people who will not consider moving though they would like to as the tax impact is too high.

    • lifelogic
      Posted March 24, 2011 at 10:23 am | Permalink

      Indeed JR they just stay put and do a roof conversion. If they more they it might well cost them perhaps £100,000 in stamp duty and other costs, legal agents just down the drain. Do a roof conversion stay put for say £50K and probably get that back in the end.

      When we had MIRAS mortgage tax relief their was a clear incentive to buy rather than rent now stamp duty and fewer benefits for owners who loose their jobs mean that renting is now treated far better than buying.

      Get rid of silly tax distortions like enterprise zones the above and the new build only help for buyers all counter productive like 52% and is.

  4. A.Sedgwick
    Posted March 24, 2011 at 8:06 am | Permalink

    I am surprised that Capital Gains Tax only raises £3 billion. If it was removed altogether my guess is the benefit to the economy would see a reduction in government costs more than that.

    • lifelogic
      Posted March 24, 2011 at 10:28 am | Permalink

      Also it taxes gains that are just inflation and not real actual gains. It should be 15% tops after inflation adjustments to maximise revenue and not deter activity.

      IHT is counter productive too similar rates or non at all should apply does not raise much anyway more harm than good.

  5. Brian Tomkinson
    Posted March 24, 2011 at 9:23 am | Permalink

    Reagan’s words: “The problem is not that people are taxed too little, the problem is that government spends too much.” The pity is that even a Conservative lead government can’t stop being spending junkies. Ever since you brought to our attention, many months ago, that total cash spending was planned to increase for the next five years I have wondered why the markets have reacted so kindly to Osborne’s plans. The only reason I can conclude is that this country is regarded as less of a problem than many others and that reducing the deficit by increased taxation has for the moment satisfied them. Today, we heard on the BBC that bailing out Portugal is likely to cost us another £3-£4billion of money we don’t have. The interest costs of our ever increasing debt is over £40billion and will soon be more than £60billion per annum. I know this situation was created by Labour but how can anyone believe that we are really getting on top of it? I wish we were but fear we are not and that the money markets will act when they have dealt with the PIIGS.

    Reply: I do not think the UK should contribute to any Euroland bail out. I was one of a few who voted No this week to a proposal to include us in pre 2013 bail outs, a proposal backed by most MPs.

    • Brian Tomkinson
      Posted March 24, 2011 at 9:36 am | Permalink

      John,
      Thanks for your reply. I take it that, despite your opposition, we will be borrowing another £3-£4billion to bail out Portugal. No doubt this will be followed by another sum for Spain later in the year.
      How long can this madness continue?

  6. oldtimer
    Posted March 24, 2011 at 9:56 am | Permalink

    My expectation is that these government borrowing forecasts will suffer the same fate as the Brown forecasts. They understate, year by year, the total government debt that will ultimately materialise. The causes for this are likely to include a failure to get to grips with the control of public spending that the situation demands coupled with a failure of the economy to grow at the rates presently forecast. I fear it will all end badly.

  7. Electro-Kevin
    Posted March 24, 2011 at 10:06 am | Permalink

    I listened to Mr Osbourne on Radio 4 today. He did well. (I’ve always liked him)

    His could have been a far more effective budget and he a far more effective Chancellor.

    He could afford to be more Churchillian. He still has room to be tougher in the good-will lent your party by voters. His budget should have been more Conservative. If anything Mr Cameron is the weak link.

    Listening to broadcast journalists and chat show hostesses you’d be forgiven for not realising that there had been the biggest banking crisis since the ’30s with a record budget deficit left by Labour. It barely gets a mention and it’s always Tories having to mention it.

    “Tories – nasty – they love to cut spending for no reason… BOOOOOOO !”

    “Labour – nice – they love to give us jam today … HOORAY !”

    It really does seem to be as simplistic as that – even on Radio 4.

    Your party is never going to win the broadcast media over. In fact your party’s biggest mistake has been to even try. The good news is that you don’t need to because voters get their information from other sources and from personal experience.

    There are key things your Government could be doing which would transcend all class boundaries, resonate through every working household and which would galvanise this country into action for economic recovery.

    We need to believe that the political class believes in a country called Britain.

    The prevailing evidence is that it doesn’t.

  8. Paul H
    Posted March 24, 2011 at 10:10 am | Permalink

    Slightly off-topic, but how high do you think CPI will go before the MPC “cracks” rather than lose all credibility?

    reply: I think the MPC is close to raising interest rates, and CPI might go to 5%

    • Paul H
      Posted March 26, 2011 at 5:49 pm | Permalink

      I was rather hoping you would answer the question, not just post it …

  9. Andrew Gately
    Posted March 24, 2011 at 10:30 am | Permalink

    I agree with your point regarding the take from Capital gains Tax now being lower due to a higher CGT rate.

    I notice that you also mention stamp duty and I just wanted to add some points on what the governmentcould and should be doing regarding stamp duty:

    The 3% and 4% rates of stamp duty has not been reviewed since 1997.

    In 1997 £250,000 would have purchased a five bedroom detached house with grounds in a very desireable area. Now £250,000 purchases a a typical terraced three bedroom family in a fairly average neighbourhood. I would suggest that a new rate of 2% is brought infor properties over £250,000 and that the 3% and 4% rates are moved up a CGT band.

    The second point is that stamp duty should be incremental. As suggested if a rate of 2% was brought in then it should only be the amount above £250,000 that should attracts 2% stamp duty rather than the whole amount as is currently the case. The first £125,000 would attract stamp duty at 0% the next £125,001 to £250,000 at 1% and the balance over £250,000 would be charged at 2%.

    I think that if the above changes to stamp duty had been included in the budget they would have done much to improve the housing market rather than the shared equity scheme. I have never been a fan of these schemes and believe that if the government has to help you buy a house then property is overpriced. If property is overpriced then the market will sort it out left to it’s own devices and expensive interventions by the govt. will only defer but not derail the housing market correction.

    These changes to stamp duty would reduce dramatically the amount of stamp duty payable per transaction but much improve the fairness of stamp duty. However hopefully this tax loss per transacion could be offset by an increase in activity in the housing market so that the overall tax tax take is neutral or higher.

  10. acorn
    Posted March 24, 2011 at 10:41 am | Permalink

    It is worth having a read of the Budget at http://cdn.hm-treasury.gov.uk/2011budget_complete.pdf

    Particularly Tables 2.1 and 2.2. See all the tax changes that take affect THIS year which were mandated in budgets from PREVIOUS years. The petrol duty escalator was only one of many. The government knows that the little people and the media will have forgotten all about these. This is now an established “stealth taxing” technique, adopted by all recent governments.

  11. Robert
    Posted March 24, 2011 at 12:33 pm | Permalink

    John – I am going to continue with my hobby horse which is that yet again the Tories will not think the unthinkable with regard to Government expenditure. What cuts ? If you started with a blank piece of paper you would be able to cut the state by at least a third if not 50% without cutting the number of teachers or Doctors or Nurses. The fact that both national and local government empires have grown exponiently to justify their existence through a myriad of rules and regulations which go way beyond a duty of care to either employees and customers. What has happened to the promised ‘bonfire ‘of rules and regulations – in the the large scheme of things nothing, just symbolic tokens so far. Sadly, we will not be given that much time, the risk on growth is as you rightly point out on the downside, like a household or business we have to actually make real and significant cuts in government expenditure as the sands of time will run out. Nothing should be ring-fenced, until we face up to this and alert the electorate to the real consequences of living the lie then we will be headed for an even greater crisis where we will have very limited, if any room for manoeuvre. Put simply the political class of all persuasions, bar the odd exception, has failed to portray the real situation on the back of political expediency or simply buried their head in the sand.

  12. StrongholdBarricades
    Posted March 24, 2011 at 3:39 pm | Permalink

    I believe that George Osbourne missed a trick with this

    If he had proposed a nil rate band on money invested into UK manufacturing by “Angels” that is held for 5 years that may have sucked in the necessary finance without actually costing the Treasury very much at all.

    By the time the businesses were then ready, it would be hoped that Corporation tax had also been reduced to be competitive with Switzerland and Ireland.

  13. Simon
    Posted March 24, 2011 at 3:44 pm | Permalink

    Keep up the good work J.R.

    Some of us appreciate it .

    Can’t believe the gall of the member who thinks it’s innevitable that the UK will join the Euro . Don’t the populace get a say in anything ?

  14. Bazman
    Posted March 24, 2011 at 3:45 pm | Permalink

    The problem of tax cuts is that you are going to put more people on the dole in the short term, even if the medicine does work, which there is evidence to say it will not. There are millions claiming dole/income support. If you have a couple on the dole with two children living in a council flat then they are going to get about £220pw in benefits of which they will have to pay about £20 in rent and £30 in fuel costs. Leaving about £180 a week to live on. Not much for two adults and two children, though they would not die. If you were to make them pay for healthcare, rent, council tax they would hardly have enough to pay the rent/council tax, so their health would suffer and many would die. Some might see this as a solution, but if it was me I would not go quietly. Therein lies the problem for the fantasists who think we could just cut benefits and healthcare and nothing would happen.
    To think the private sector would just take up slack after massive tax cuts and deregulation and employ all these people is another fantasy. Past experience has shown they just trouser the cash and flog the minimum amount of workers on the minimum wage in dangerous conditions, at least whilst there is work there then it is back on the dole.
    The minimum wage is £5.93 of which some believe they should pay health costs, road tolls, pensions, rent/mortgage and all other services at point of use, not to mention clothing and feeding their families. On less than £240pw? Some even do not believe we should have a minimum wage and this will somehow push up the wages. How out of touch with reality do you have to be to think this is true?
    I shall retire to my drawing room to ponder these questions further.

    • Jon Burgess
      Posted March 24, 2011 at 10:36 pm | Permalink

      Bazman

      Tax cuts are only necessary because golden Gordon raised the rates too high.
      Government spending cuts are only needed because Golden Gordon and Tony the Tiger allowed total expenditure to expand too much. So, spending went up and the tax burden was raised and raised and raised, and eventually those paying the tax that could do something about it, had enough and left or retired/downsized/gave up.

      Reducing tax when it has been raised too high really does bring in more money. So what would you do? Balance the books, or keep rates high out of spite to “send a message’ and worsen the deficit?

      I agree with you that the Governement is there to provide a safety net for those who really cannot look after themselves. But that is where the line should be drawn. Something is wrong where the majority of the populace benefit from some kind of Government handout – child benefit, for example, or working tax credits. There really could be drastic cuts in Government spending without impacting on frontline services. This year, I think spending will be £713bn. 10 years ago it was £362bn. Do you think the UK is better for this doubling in Gov spending? Incidentally the tax take last year was about £550bn, so assuming receipts this year are the same this is where the deficit comes from. The UK cannot go on like this!

      Socialist Governments seek to become the sow from which the population must suckle. Their aim is to take from the productive to redistribute to the unproductive. Truly conservative governments leave people with more of their own money and reduce the effect of the state. My view is the conservative approach has a better outcome for everyone – rich and poor alike.

    • Simon
      Posted March 25, 2011 at 10:10 am | Permalink

      Quote “The problem of tax cuts is that you are going to put more people on the dole in the short term”

      Could you explain why you believe that to be the case ?

      Surely taxes on businesses which are not making significant profits will lead to their premature demise with losses of jobs ?

      Quote “The minimum wage is £5.93 of which some believe they should pay health costs, road tolls, pensions, rent/mortgage and all other services at point of use, not to mention clothing and feeding their families. On less than £240pw?”

      Some may believe it but they are in the minority . We get good value from our state healthcare . We could get good value from eduction too if it had not been subject to continual political meddling .

      The Govt itself ring fenced the NHS didn’t it ?

  15. Philippa Pirie
    Posted March 24, 2011 at 3:45 pm | Permalink

    Your 4th para starting ‘Total borrowings will be…. 165.5 and 167.4. Shouldn’t these read trillion, not billion? At any rate I don’t understand how the second sentence can follow.

    Reply: That’s the annual extra borrowings in billions.

  16. Javelin
    Posted March 25, 2011 at 12:18 pm | Permalink

    The significant figure in this is in 2015/16 – is £66B (or 8.8%) of Government spending being spent in interest payments. The Tax Payers Alliance adding that once the off balance sheet costs of Private Finance and Pension are counted in it will rise to £200 billion – or a whopping 25% of Government spending.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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