Julian Knight: It doesn't matter if we pay now or next year, this Budget will hurt

At first glance, Chancellor George Osborne has two options in this week's Budget, either to go for the tax rises and cuts that are needed now, or to reveal just a proportion as a down payment to keep the markets sweet.

Both options have their pluses and minuses. Setting out the tax- and-spend agenda now will be following closely the Canadian model of cut deep and quick to get the trauma over with. The Canadians, who grandiosely went about demolishing hospitals to show their macho cutting prowess, is an example which has been closely watched by the new government. They managed to slash public-sector spending without the disastrous popular discontent seen in Greece recently. Think of it like the approach of a pre-chloroform surgeon, getting the patient drunk before performing the radical amputation: horrific when it happens but at least it's quick.

This approach would also help the coalition leadership to head off potential enemies within – on the Tory side the Redwoods and Davises of this world, on the Lib Dem side Hughes and Kennedy. Take the decision now when they are still in the honeymoon period and there is just a chance they will get away with it, particularly as the Budget is less likely to be the subject of guerrilla tactics than a solitary bill, such as the proposed sale of the Post Office. The opponents within will be faced with the stark choice of backing the Budget and the cuts or bringing the Government down within a few weeks of taking office.

However, the big problem with cuts now is that taking a pile of money out of the economy through tax rises and spending cuts could send it back into recession. This time it won't be global economics to blame; it will be domestic, like Ireland or Spain are experiencing now. Of course, the talk in the election that removing £6bn of spending right away – through measures such as scrapping the child trust fund – would send us back into recession was bunkum, but £40bn, £50bn or even £60bn straight away – then it's a racing cert.

Balance will be the key to this Budget: how to announce and get people used to the pain without actually taking the money right now. Therefore, expect lots of measures announced for the next tax year. Of course, this runs the risk of a 10p-style tax rebellion on the back benches, but it is the only sensible way to go. Pain announced now but, in reality, phased in.

Make no bones about it: this is the most important Budget for the UK since at least 1981 and perhaps even since the Second World War. The balancing act that has to be performed is so fine, and a lot of its success or otherwise will be down to international events and plain simple luck – such is the nightmarish state of the public finances Labour has left.

Drilling down into the likely measures, let's take a capital gains tax rise as a given. Ever since this rise was first mooted at the time the coalition was formed, a powerful lobby of dissident Tory MPs, City fund management firms and, of course, accountants have been using every argument that it will be a disaster and discourage Middle England from saving. This is utter rubbish. CGT is being used as a tax dodge by the rich masquerading income as a capital gain to take advantage of the lower 18 per cent rate. This needs to be addressed.

In addition, I think it will be a very healthy thing for profits on second homes to be taxed at least 40 per cent if this provides a disincentive. However, I do have a genuine concern that the annual CGT allowance of £10,100 will be slashed, perhaps in half, which would just start to bring normal, everyday people into the scope of the tax which at the moment is largely the preserve of the rich or those who don't plan their asset disposal properly.

As for pensions, the likelihood is that the top rate of pensions tax relief will change, but that there will be a cap on annual contribution size. In effect, people will be stopped from dumping lots of money into pensions and earning a massive income from it in retirement. Fair enough, as the tax break shouldn't be there purely to let the rich protect even more of their wealth. However, there is a real chance to do something radical with pensions which can raise some cash for the Treasury while actually encouraging more people to save.

About £13bn a year goes to top-rate taxpayers in the form of relief on their pension contributions. In their election manifesto, the Lib Dems proposed scrapping this and using the money to raise personal allowances. Now, higher personal allowances would be welcome, but it's tantamount to taking from tomorrow's savings to pay today's expenditure – which is precisely the attitude which got us into this financial mess in the first place.

Instead, why not go ahead and abolish the higher rate relief but set a single new rate for everyone, say 25 per cent? This would mean that basic-rate payers – many of whom aren't contributing to a pension at all at present, which will mean relying on state benefits in old age – will see that they can earn extra for paying into a pension.

It's gone unnoticed that private pension saving among basic-rate tax payers has gone through the doldrums at exactly the same time as the basic rate of income tax has fallen to 20 per cent. If the Government wants to raise cash to pay for higher personal allowances, then a far better way is to scale back the incredibly complex and fraud-prone tax credit system as well as ending the ridiculousness, of paying universal child benefit instead of means-testing it.

Any of these measures, though, are barely going to scratch the surface of the deficit. The heavy lifting will no doubt be left to VAT and spending cuts which are going to be even deeper due to the commitment to keep the NHS and international development ring-fenced.

Long term, this Budget and, crucially, the next comprehensive spending review, will change the face of this country and your every day experience of what the state provides and what you have to pay for out of your own pocket.

Rest in peace FSA: 1997 – 2010

So the Financial Services Authority is to be killed off and replaced with a consumer protection agency. No surprise there; it's been on borrowed time since its catastrophic failure in regulating Northern Rock. In the main it's been a bloated, rather arrogant and slow-witted watchdog, seemingly unable to marry its twin roles of promoting financial services in the UK and protecting the consumer. There has been an improvement, but all in all it's good riddance FSA. You will not be mourned or missed.

Having said that, though, I am worried that under the Lib-Cons we will end up with the talent migrating to the newly beefed-up Bank of England, leaving the new consumer protection agency as a backwater. The Tories have never really seen much point – until the credit crunch – for an effective regulator. We need a reinvigorated consumer body, perhaps without the deadwood FSA staff who are more into designing pointless rules than spotting worrying mis-selling trends. Let's hope this Government can deliver, and that it makes a break with the past – but I'm not holding my breath.

'Discrimination' is a fact of life

In its usual rabble-rousing way, Which? makes the pronouncement that insurers "discriminate" against older people when it comes to some insurance policies. It's a very loaded word, "discriminate". But its true meaning according to the dictionary is to "note the difference of and between or to distinguish". That's a pretty good description of the insurance industry per se, based entirely on discrimination.

What Which? found was that the older you are, the more you have to pay for travel cover. Some insurers don't cover over-75s, or premiums can rise threefold. As any young driver will tell you, they too find they are "discriminated" against with their car insurance. We will brush past the fact that older drivers benefit hugely from this discrimination and have access to certain companies that will cover only the over-50s.

As you enter your 70s, you are statistically far more likely to suffer a life-threatening or debilitating illness which, if it were to happen on holiday, would set a travel insurer back thousands. If the risk wasn't there, the premium would be lower. In short, higher premiums for travel cover when you get older are just a fact of life.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Suggested Topics
PROMOTED VIDEO
Life and Style
fashionHealth concerns and 'pornified' perceptions have made women more conscious at the beach
Arts and Entertainment
tv
Sport
Ojo Onaolapo celebrates winning the bronze medal
commonwealth games
Arts and Entertainment
Rock band Led Zeppelin in the early 1970s
musicLed Zeppelin to release alternative Stairway To Heaven after 43 years
Arts and Entertainment
High-flyer: Chris Pratt in 'Guardians of the Galaxy'
filmHe was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star
Sport
Van Gaal said that his challenge in taking over Bobby Robson's Barcelona team in 1993 has been easier than the task of resurrecting the current United side
footballA colourful discussion on tactics, the merits of the English footballer and rebuilding Manchester United
Life and Style
Sainsbury's could roll the lorries out across its whole fleet if they are successful
tech
Travel
The shipping news: a typical Snoozebox construction
travelSpending the night in a shipping container doesn't sound appealing, but mobile crash pads are popping up at the summer's biggest events
Arts and Entertainment
'Old Fashioned' will be a different kind of love story to '50 Shades'
film
Arts and Entertainment
Tracey Emin's 'My Bed' is returning to the Tate more than 15 years after it first caused shockwaves at the gallery
artTracey Emin's bed returns to the Tate after record sale
Arts and Entertainment
Smart mover: Peter Bazalgette
filmHow live cinema screenings can boost arts audiences
Environment
Neil Young performing at Hyde Park, London, earlier this month
environment
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Project Manager (HR)- Bristol - Upto £400 p/day

    £350 - £400 per annum + competitive: Orgtel: Project Manager (specializing in ...

    Graduate / Trainee Recruitment Consultant - IT

    £25000 per annum + OTE £40,000: SThree: Orgtel are seeking Graduate Trainee Re...

    HR Business Partner - Banking Finance - Brentwood - £45K

    £45000 per annum + Benefits: Ashdown Group: ** HR Business Partner - Senior H...

    PA / Team Secretary - Wimbledon

    £28000 - £32000 per annum + Benefits: Ashdown Group: PA / Team Secretary - Mat...

    Day In a Page

    Save the tiger: The animals bred for bones on China’s tiger farms

    The animals bred for bones on China’s tiger farms

    The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
    A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

    A former custard factory, a Midlands bog and a Leeds cemetery

    Introducing the top 50 hidden spots in Britain
    Ebola epidemic: Plagued by fear

    Ebola epidemic: Plagued by fear

    How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
    Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

    From 'Parks and Recreation' to 'Guardians of the Galaxy'

    He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star
    How live cinema screenings can boost arts audiences

    How live cinema screenings can boost arts audiences

    Broadcasting plays and exhibitions to cinemas is a sure-fire box office smash
    Shipping container hotels: Pop-up hotels filling a niche

    Pop-up hotels filling a niche

    Spending the night in a shipping container doesn't sound appealing, but these mobile crash pads are popping up at the summer's biggest events
    Native American headdresses are not fashion accessories

    Feather dust-up

    A Canadian festival has banned Native American headwear. Haven't we been here before?
    Boris Johnson's war on diesel

    Boris Johnson's war on diesel

    11m cars here run on diesel. It's seen as a greener alternative to unleaded petrol. So why is London's mayor on a crusade against the black pump?
    5 best waterproof cameras

    Splash and flash: 5 best waterproof cameras

    Don't let water stop you taking snaps with one of these machines that will take you from the sand to meters deep
    Louis van Gaal interview: Manchester United manager discusses tactics and rebuilding after the David Moyes era

    Louis van Gaal interview

    Manchester United manager discusses tactics and rebuilding after the David Moyes era
    Will Gore: The goodwill shown by fans towards Alastair Cook will evaporate rapidly if India win the series

    Will Gore: Outside Edge

    The goodwill shown by fans towards Alastair Cook will evaporate rapidly if India win the series
    The children were playing in the street with toy guns. The air strikes were tragically real

    The air strikes were tragically real

    The children were playing in the street with toy guns
    Boozy, ignorant, intolerant, but very polite – The British, as others see us

    Britain as others see us

    Boozy, ignorant, intolerant, but very polite
    How did our legends really begin?

    How did our legends really begin?

    Applying the theory of evolution to the world's many mythologies
    Watch out: Lambrusco is back on the menu

    Lambrusco is back on the menu

    Naff Seventies corner-shop staple is this year's Aperol Spritz