Wednesday, 23 March 2011

Why is the Great Osborno revealing his Magic Circle tricks of the trade?

So has the Chancellor learnt from last year, when so many of the Great Osborno's conjuring tricks unravelled within 24 hours of his Comprehensive Spending Review that supporters as well as opponents, and every neutral analyst, felt that the hyper-tricksy presentation had been so manifestly misleading that it had risked undermining the Chancellor's core arguments.

It seems unlikely. With the budget having been so much more comprehensively leaked to the media than on any previous occasion, commentators are mostly wondering what the final rabbit from the hat might be.

There would be some merit in an untricksy "staying the course" budget in which Osborne's task, having made the major spending and tax decisions for the Parliament, is to persuade the public that growing scepticism about the cuts being too deep and too fast is off the mark. He seems more likely to employ a range of distraction techniques.

That won't be his choice.

Yet the great conjuring Chancellor is bizarrely breaking all of the rules of the Magic Circle.

The best conjurors depend on not letting daylight in upon magic, so the audience can not see how the trick was done.

If you just repeat hoary old tricks that have already been worked out - and even brief the newspapers in advance as to what the sleight of hand is all about- then it makes it difficult to see how the sleight of hand will ever generate the desired suspension of disbelief.

Yet The Telegraph has been briefed on how Osborne will today exaggerate the value of his tax threshold change

Increasing the threshold by £600 is worth a maximum of 20p in the pound, so clearly could not be worth more than £120 to any taxpayer. (The change is worth least to lower earners who do not use the full threshold. A part-time worker on £6000 a year will gain nothing at all, while today's change is worth £1.25 a year to somebody earning £7500 a year, but it will be worth 100 times more to higher earners). But that's "up to £320" in Osborne money, if you reannounce last year's announcement too, roll it in, and then strip out inflation on the assume voters would prefer to think about its nominal value than whether or not it makes any real difference to their living standards.

Mr Osborne’s move to raise the tax threshold will see an average saving of £45 a year, when taking into account inflation. Mr Osborne will say that the measure will mean that basic rate tax payers will be £200 a year better off in real terms from next spring – but in cash terms the savings is £320 ... Measures already announced will see basic tax rate payers better off by £160 from this April, and that will rise to more than £200 next year. But the total cash benefit, not accounting for inflation, is £320.

Still, that's a £320 tax cut for millions in the Mail, and a £205 tax cut today in The Sun).

For all of the smoke and mirrors, two things can not be in dispute.

First, Osborne's tax increases - particularly on VAT - cost taxpayers more than his tax cuts save them.

Second, Osborne's policy has been to shift the burden of taxation from direct to indirect taxes - which means the poor paying a higher share of taxes.

That doing this would hurt the poor was set out very clearly by David Willetts in 2005, on the impeccable grounds that VAT is a much more important tax on less well-off households than income tax.

The tax that poor people pay isn’t income tax. The poorest 20 per cent of households sacrifice 28.5 per cent of their income in indirect tax, of which the biggest single item is VAT ... If we really wanted to cut the taxes poor people pay we would be looking at indirect taxation.

That the Osborne policy has, with enthusiastic LibDem support, shifted the burden of taxation further onto the poor can be seen very clearly in practice too. Howard Reed and Tim Horton have modelled the impact of Osborne's tax shifts - since not making the income tax changes (worth £3.7 billion before today and more after) would have enabled him to reduce the VAT hit by a similar amount, without affecting his deficit reduction plan.

So perhaps all of the Great Osborno's magic tricks are now delivering diminishing returns - unless he really does have a special potion which can make the Institute for Fiscal Studies disappear.

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