YOU’LL have heard a lot in recent weeks about the notion of “making work pay” as the government tries to justify its callous welfare reforms.
In defending the cuts taking effect over the past week, the Chancellor insisted they were about “making sure that we use every penny we can to back hard-working people who want to get on in life”.
We could spend all day pointing out the flaws in that sentence alone, starting with the impact of his government’s policies on job security and wages.
But George Osborne’s claims to be about “making work pay” are fatally undermined by quietly introduced but very significant changes affecting middle income earners.
More than a million people have been dragged into the 40 per cent tax band since Osborne walked into No 11. Another 400,000 or so are set to join them as a result of a further narrowing of the basic rate band (the amount you can earn at 20 per cent income tax before the higher rate tax band begins). The higher rate threshold falls to £41,450 this weekend, with the start of the new tax year, down from £42,476 currently and compared with £43,875 in 2010/11.
The combination of the lower threshold and inflation have created a powerful fiscal drag that means 40 per cent tax is no longer the preserve of the wealthy.
Personal allowances have increased since 2010, but for those on the cusp of the higher rate band that benefit is being wiped out. And while the threshold will rise slightly next year, the long-term trend towards a lower higher rate tax band is unlikely to be reversed.
The number of people who pay 40 per cent tax on part of their income will go past 5 million next year, according to the Institute for Fiscal Studies, up from 3.1 million when the coalition government came into power in 2010. Before long there will be people earning close to the national average paying 40 per cent tax.
It’s a tax increase by another name and makes it quite clear that the Chancellor has a somewhat selective notion of “making work pay”.
The mortgage market is improving and lenders are open for business, we were told last month as higher lending figures were reported. There is some truth in the first part of that sentence; the second part remains open to debate.
The funding for lending scheme (FLS), launched by the Bank of England last summer to give lenders access to cheaper funding, has helped drive down mortgage costs. The main beneficiaries have been those with deposits or equity or more than 25 per cent.
There’s certainly been more activity in the housing market, not least in Edinburgh and the surrounding area, although low consumer confidence continues to hold back sellers.
Are lenders really loosening the purse strings though? The Bank of England’s latest credit conditions report reveals that while mortgages are likely to become even cheaper, lenders are rejecting a higher proportion of applications.
Lenders continue to cherry pick borrowers. Rigorous checking of credit scores is a good thing, if it means identifying borrowers who’ll struggle to repay their loans, but there’s far too much inconsistency. Rejected buyers aren’t told why their application was turned down, while different lenders have very different criteria. So while the strongest applicants benefit from cheaper mortgages, it’s a different market for the rest.
The government can launch all the first-time buyer schemes it wants, at the risk of freezing first-timers out by driving house prices up. But many of the constraints holding back the mortgage market still aren’t being recognised, let alone addressed.