Budget 2015 - the sequel: George Osborne screws the Civil Service...

It might have been easy to miss amidst the torrent of announcements that George Osborne finally made it clear that, whilst Britain deserves a pay rise, his largesse does not extend as far as the civil servants who are expected to deliver his reforms.

The announcement that pay restraint would be extended for another four years will have come as a body blow to many who have seen their pay go backwards relative to the wider economy over the past five years, by as much as 15% in some cases.

As the Budget Report says;

1.85 In the last Parliament, the government exercised firm restraint over public sector pay to deliver reductions to departmental spending, saving approximately £8 billion. As set out by the Chancellor at Autumn Statement 2014, the government will need to continue to take tough decisions on public sector pay in order to deliver reductions to departmental spending and protect the quality of public services. 

1.86 Overall, levels of pay in the public sector are now, on average, comparable to those in the private sector. However, public sector workers continue to benefit from a significant premium once employer pension contributions are taken into account, as shown in Chart 1.10. 

1.87 In light of this and continued low inflation, the government will therefore fund public sector workforces for a pay award of 1% for 4 years from 2016-17 onwards. This will save approximately £5 billion by 2019-20. The government expects pay awards to be applied in a targeted manner within workforces to support the delivery of public services.

In other words, £13 billion worth of cuts have been, and are to be, borne by public servants who have seen their job security taken from them, their pension contributions trebled and quadrupled, and their workloads increased - 'doing more with less' has become the ever-present buzzphrase in central government.

But, we were all in it together, weren't we? And the country was in a hole, right?

Well, if you look at the OBR projections for the next four years, average earnings growth is expected to be 3.8% over the next four years, compared to the 1% increase permitted for the public sector. And inflation? Approximately 1.7%, which means that public sector workers will fall far behind their private sector counterparts and see real terms cuts for good measure.

Now, it should be noted that a 1% increase in the paybill does not equate to a 1% increase across the board. Public sector jobs come with a payscale, whereby you enter at the lowest level (usually) and reach the maximum for the grade by means of increases over a period of years. Thus, those at the top of the payscale get less. The more numerate amongst my readers will see where the issue is here. Experienced staff will be even worse off, as has been the case for the past five years.

One side effect of the reduction in public sector jobs over the past five years is a significant fall in recruitment, and a resultant greying of the workforce that remains. Indeed, Lin Homer, Chief Executive of HM Revenue & Customs, noted that very concern a few years ago, and the National Audit Office repeated the message last month.

And, when the greybeards go, as they undoubtedly will, many sooner rather than later, the promise that pay will fall behind inflation from the day a new recruit walks through the door is hardly likely to act as an incentive to join. And, for those who have marketable skills, the decision as to whether they stay or go just got a whole lot easier.

You might almost think that the Conservatives wanted to destroy the public sector. But who would administer the country then?...

Budget 2015 - the sequel: how giving people money might make them worse off

Today's 'emergency' budget has left much to think about, especially in terms of those who are thought to have lost out through changes to tax credits and other parts of our welfare system. And, indeed, there will be much pain in some quarters, but before I dive in, I'd like to take a closer look.

In the meantime, one thought springs to mind...

One of the least successful budget proposals from Gordon Brown's time as Chancellor was the introduction of a 0% rate band for corporation tax, whereby the first £10,000 of taxable profit was free from tax. Combined with divided changes that meant that, for basic rate taxpayers, there was effectively no tax paid on dividends (the tax credit is calculated by grossing up the amount paid by 11%, but no money is actually handed over). That led to an explosion in the number of limited companies formed.

Good, you might think, people taking control over their own lives. Well, yes, if you were genuinely setting up a new business. However, if you were moving from being an employee to being a director of a limited company doing the same thing, you were moving out of an environment whereby you had paid holiday time and sick pay, and into an environment where you had to make your own pension provision and ensure compliance with tax legislation, i.e. employ an accountant.

The evidence was that it was good for employers and service industries, not so good for individuals, as it moved liabilities away from big companies and placed them on much smaller, less resilient ones. And, from a government persepctive, it meant less income, and greater risk, as a limited company can walk away from its debts with little risk to the directors. It wasn't great for existing small businesses either, as their cashflow was at greater risk.

One wonders whether the introduction of the new £5,000 tax free allowance for dividends, combined with the reduction of the basic corporation tax rate to 18% will have the same effect.

In truth, getting impartial advice on whether or not to form a limited company is hard to find. Accountants have an evident conflict of interest, in that the fees they can charge for corporate accounts is higher, and they experience no personal risk one way or the other. The impact of becoming a company director is not always obvious and, in an environment where most people are surprisingly unsophisticated in terms of their personal finances, the headline impressions given by tax changes can appear awfully alluring.

Yes, you may pay less tax, but your obligations are heightened - have you seen the new Companies House penalty regime for failure to file accounts in good time? - and you are on your own if things go wrong. That works for some people, but not for others. And, frankly, most people aren't good at tax, which is good in many ways - a world dominated by accountants and tax officials is not my idea of paradise - but is potentially perilous in terms of domestic finances.

So, watch that space, although it will take a few years for the actual effects to make themselves known...

Budget 2015: to those that have, shall be given more...

I was dwelling on some of the more dramatic elements of the Budget, and found myself drawn to the introduction of a Personal Savings Allowance, to be introduced from April next year. Under the proposals, anyone receiving interest on their savings will be exempted from income tax on the first £1,000 of any interest received. Now, given that interest rates on savings accounts are, at best, around the 1% mark, you would need to have £100,000 in savings to get the maximum benefit from it.

However, how many people have that level of savings? Indeed, how many households have savings of even as much as £1,000? According to research carried out by HSBC published in late 2013, 25% of households had no savings at all, and another 10% had £250 or less, and those figures are unlikely to have changed significantly since then.

In addition, savers already have a tax-free vehicle for their cash savings, one that has been made highly flexible by recent reforms, the Individual Savings Account, or ISA. Most savers have taken the opportunity to use ISAs to shelter their savings from income tax already - why wouldn't you? So, what George Osborne has done is to offer a tax break to those who, in all honesty, probably have quite a lot of liquid cash. And do such people really need even more incentive to save?

Don't get me wrong, the creation of a savings culture is undoubtedly a good thing. Financial resilience is one of the core requisites for stable families and communities - the impact of relatively minor financial shocks in poorer households is dramatic and frightening - but for those struggling to meet their day to day living expenses, the idea of building savings is just a pipe dream.

It would have been nice if we could have found funds to provide financial advice to those who are struggling instead. Baroness Jenkin took rather a lot of stick for suggesting that some of those who currently struggle might improve matters by better use of the food they buy - she was right in some ways, but clumsy in her language. People today, myself included, have less experience of reusing leftovers but, whilst he comfortably-off can afford the waste, the poor can't.

Poor people pay more for their energy, reliant as they often are on meters for electricity and gas, they pay higher bank charges by running overdrafts or living in areas where the banks have withdrawn free cash machines (poor people really aren't that profitable for banks, they argue), they aren't able to take advantage of bulk purchases in the same way that the relatively well-off can.

Helping the poor, the vulnerable and the unlucky to make better use of their limited resources would help them in terms of financial resilience, and perhaps make it more likely that they could build up even a small reserve for a rainy day. After all, most people don't want to be poor, they don't want to be dependent.

As a Liberal Democrat, I don't want people to be enslaved by poverty. I also suspect that giving a bonus to relatively well-off people at a time when the nation is still running a significant deficit is not necessarily the best use of our national wealth...

A budget for whom, exactly?

Given my interest in matters financial, I was listening to the Budget Statement whilst wrangling a technical problem with my computer (I won in the end, thanks to a colleague). And, in terms of rhetoric, it was an interesting forty-five minutes or so. Lots of references to the Leader of the Opposition and his kitchen, his family issues, his personal tax affairs - anything to wind him up, although you would need to be either inside, or a keen observer of, the Westminster bubble to have gotten all of the jokes.

And, there is little doubt that some of the measures are probably a 'good thing'. Continued efforts to take more of the 'working poor' out of income tax should be applauded, although as the noble Lord Greaves of Pendle rightly pointed out two years ago, we're not actually doing that much now for those who were taken out of income tax by earlier increases in the personal allowance. We could, and should, have addressed the threshold for National Insurance Contributions - swapping the threshold per discrete job for a higher overall threshold, perhaps? - and the logic of subsidising low wage employers by giving their staff tax credits to make up the gap between subsisting and living.

It does strike me as perverse to allow such a obfuscation of the cost of employing people to do tasks. I require, for example, someone to stack the shelves of a supermarket so that I can find the things I want to buy. The price I pay for an item is therefore not the entire cost if I am paying taxes to subsidise the shelf-stacker's salary. Perhaps it would be better if I paid more for the item in the first place, therefore gaining a clearer understanding of the actual cost of my purchase.

And, of course, we need to address the issues surrounding those who want to work but can't, for whatever reason. At the moment, we seem to be happy to allow those in receipt of benefits to run the gauntlet of a system of sanctions for failures that may, or may not, be deliberate. Stuff happens, buses run late or are cancelled, meetings are missed because of ill-health or conflicting demands of childcare or personal crisis, and the system of sanctions kicks in without consideration of the impact.

Don't get me wrong, there should be a sanctions regime in place, but it needs to be considerate of its impact on individuals, not punitive and impersonal. We are, after all, trying to help bring people back into the productive economy, not driving them towards hunger and despair.

And, with Labour offering merely more pressure on benefit claimants, which undoubtedly means more sanctions (and please don't patronise me by trying to explain how you can be tougher on benefits without being more intrusive and more draconian), there is a space in British politics for anyone wanting to explore how you can focus DWP compliance and investigation work so as to enable those genuinely wanting to do their bit to focus on seeking work, and those who are playing the system to be tackled. That should be the Liberal Democrats, but if at present it is, we need to be more vocal in making the case.