Long, hard road to recovery

By Robert Winnett, Political Editor

About 400,000 extra people will be dragged into the higher-rate tax bracket as a result of announcements made by the Chancellor in the wake of his admission that he is going to miss crucial debt targets. 

Mr Osborne delivered his Autumn Statement amid gloomy forecasts about the state of the public finances, the continued squeeze on household spending and the need for austerity measures to last another six years. 

By raising the threshold at which people pay the 40p rate of tax by only one per cent a year – less than the expected rate of inflation – in 2015 and 2016, Mr Osborne not only ensured that more people will pay the levy through “fiscal drag” but also that current higher-rate taxpayers will lose more of their earnings to the Treasury. 

It will cost a typical higher-rate taxpayer an extra £117 annually, the Autumn Statement showed. 

Mr Osborne also launched another £2 billion tax raid on pensions – prompting warnings that private firms would stop offering final-salary retirement schemes to their workers. 

In an attempt to appease wealthier voters, Mr Osborne announced that he would bring forward laws so that benefit payments for the unemployed rise by only one per cent annually over the next few years. 

The payments have previously been linked to inflation – which has meant that the unemployed have recently enjoyed average rises in their income which were twice as high as those of workers. 

Overall, the Autumn Statement marked a shift in the burden of taxation with the middle class and wealthy paying more to fund cuts for the lower-paid and drivers. 

Mr Osborne characterised his measures as targeting “bureaucracy, benefits and the better off”. In a Parliamentary statement lasting 45 minutes, the Chancellor warned that the whole country would need to play its part in helping to reduce the country’s record debts. 

He admitted that he will miss a key target for debt to be falling as a proportion of the total size of the economy by 2015. The austerity programme has also been extended until at least 2018 – a decade after the financial crisis began. 

The Chancellor said that he was attempting to “restore sanity to public finances” and insisted that the economy was improving, albeit at a far slower pace than initially forecast. “It’s a hard road, but we are getting there,” he said. “Britain is on the right track and turning back now would be a disaster.” 

Mr Osborne also announced that he would scrap a planned 3p rise in fuel duty due to be introduced next month. However, an inflation-linked rise is still due to go ahead next September. 

The threshold at which tax begins to be paid was lifted again – by an extra £235 above what was previously announced from next April. Those earning less than £100,000 will not pay income tax on their first £9,440 of earnings. 

The rate at which higher-rate tax has been paid has been frozen at £42,476 until 2014. Mr Osborne announced yesterday it will now increase by just one per cent in 2015 and 2016. 

The effect of this “fiscal drag” will mean that the Treasury takes £1 billion a year more from higher-rate taxpayers, as 400,000 more workers enter the 40 per cent bracket – compared with if the increase had been in line with wages. 

In total, decisions made by Mr Osborne in previous budgets mean that an additional 1.7 million people will be paying higher-rate tax under the Coalition. 

The Liberal Democrats yesterday made clear their disappointment at the failure to introduce a form of mansion tax on properties – such as new council tax bands – worth more than £1 million. 

However, Mr Osborne did agree to demands to reduce the maximum amounts that can be saved in a pension. He had previously ruled out the draconian limits now being introduced. 

The maximum amount saved in a pension will be capped at £1.25 million – with the maximum annual saving reduced to £40,000. The lifetime cap will hit 340,000 people with 160,000 savers caught by the new annual limit. Up to five per cent of public sector workers will be affected. 

PwC, one of the country’s biggest accountants, said the tax and pension changes meant that those from “middle England” were the biggest losers. 

The Autumn Statement also outlined a multi-billion pound package of business tax cuts and infrastructure projects designed to kick-start the economy. 

Mr Osborne said capital spending on major projects will increase to £33 billion annually, from £29 billion under Labour. Whitehall departments will have to cut spending again over the next two years – with the £5 billion saved diverted into infrastructure, new schools and science projects. 

There will be upgrades to the A1, A30, and M25. The High Speed 2 rail link will be extended to the North West and West Yorkshire, and the London Underground’s Northern Line will be extended. 

There will also be funding to assist building of up to 120,000 homes, £600  million for science, £270 million for further education colleges, and £1  billion for schools. 

Corporation tax will be reduced to 21 per cent by the next election – and the investment allowances for businesses will be increased by10-fold. 

Ministers claimed that Britain would soon have one of the most competitive business tax regimes of any major economy. 

Labour accused Mr Osborne of undermining economic growth by refusing to water down the austerity programme. 

Ed Balls, the shadow Chancellor said: “The Chancellor has confirmed Government borrowing is revised up this, next year and every year. And it is people already struggling to make ends meet – middle and lower income families and pensioners – who are paying the price.” Telegraph