Is George Osborne morphing into Gordon Brown V2.0

By Stephen McPhie, CA
Partner, RSD Solutions Inc.

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Periodically I have a rant about politicians in general and tax in particular.  So far, none of these rants has been complimentary.  I look forward to the day when I can say something positive although I’m not looking with much anticipation.

Gordon Brown, Labour party’s long time Chancellor in the late 1990’s and 2000’s, might have been proud of the recent UK budget delivered by George Osborne, the conservative Chancellor of the Exchequer (Finance Minister in plain English).  It added yet more complexity to the tax system, contains a number of stealth taxes, and attacked investors, pensioners and small business owners with significant tax increases on dividend income.  It was in many ways a political budget, apparently laying traps for the opposition Labour Party and setting out Osborne’s stall for his bid to succeed David Cameron as party leader.  This, in spite of the facts that Labour seems to be doing its best to self destruct politically and that the next election is almost 5 years off. 

This seems a strange budget in many ways from a Tory Chancellor.  Major cuts to benefits and tax credits were expected.  Osborne has in the past railed against the hugely complex tax system in the UK, but after more than 5 years, his small moves to simplify the tax system have been swamped by added complexities in successive budgets.

The dividend tax which takes effect from April 6, 2016, and is a form of double taxation, was certainly not expected.  Ironically, those earning over around the low £50,000’s and have additional dividend income will be better off; many people of more modest means will be worse off.  Pensioners relying on significant dividend income are one such group. 

This tax grab appears to have been done without consideration of its effect.  One of the arguments is that taxation of corporate profits has fallen from 28% to 20% now and will fall to 18% in a couple of years’ time.  So we have a Tory government giving with one hand and taking away with the other.  However, this is not the case for small businesses whose tax rate has not fallen from its level of 20%.  They will get a 2% reduction in the rate but will have to wait until 2020 for that, although the new tax takes effect from April 2016.  This new tax is likely to hit a lot of small business owners hard.  Small businesses re the lifeblood of the economy and many of these owners have little job security and work long hours for fairly meagre returns.

As noted above, this budget appears to be very political.  It has not escaped notice that Osborne is widely expected to seek leadership of his party, and quite possible prime-ministership, once David Cameron fulfils his stated intention of stepping down before the next election.  As well as laying political traps for the opposition party, it appears to contain traps for possible future opponents for the leadership within the Conservative party.  It is a shame that tax policy of this nature is shaped around politics, resulting in economic distortions and sub-optimal outcomes over time.  However, being an observer of much of what goes on in Canada and some of what goes on in the U.S., I am well aware that this is not a situation unique to the United Kingdom.