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Mixed verdict on Brown's tax legacy By Rob Griffin
After Chancellor Gordon Brown delivered what was widely expected to be his last Budget speech, economists and financial advisers were left with contrasting opinions about his achievements over the past decade. While According to Dr Madsen Pirie, president of the Adam Smith Institute, Brown's actions in the opening weeks of his tenure set the tone for the way he would manage the country's finances, with a great decision followed by a terrible one. Although giving the Bank of England freedom to set interest rates was a tremendous move, he says, the scrapping of tax-relief on dividends paid into pension funds has been an unmitigated disaster. "Granting independence to the Bank of England provided a helpful background for our economic development with stable money and inflation under control," he says. "The confiscation of £5 billion a year from pension funds - approximately £100 billion over 10 years, when compounded - was one of the worst things he could have done." This so-called pension raid has recently come back to haunt Brown. Documents released under the Freedom of Information Act appear to show that Brown ignored warnings from his own officials about the potentially devastating impact of the policy. It is claimed he was told the repercussions would include the lower paid becoming worse off, pensioners due to retire immediately losing out, businesses struggling to adjust to the changes and shares dropping by between 6% and 20%. IHT In many cases, however, it's been what he hasn't done, rather than what he has done, that has impacted most on our finances. He hasn't, for example, increased the thresholds for stamp duty and inheritance tax (IHT) in line with soaring house prices. During the last year of John Major's conservative government, the stamp duty from the sale of residential properties stood at a relatively modest £675 million. But by the 2005/06 tax year it had risen to a staggering £4.6 billion on the back of increasing house prices and a string of interest rate increases. It's a similar story with IHT, which has proved to be a lucrative source of income for Brown. Plans announced in the most recent budget to increase the point at which IHT is paid at 40% to £350,000 still don't reflect what's happening in the UK property market, claims Dean McCarthy, director of Cobalt Private Finance. Since this nil rate band hasn't been increased in line with house prices, Brown's claim that 94% of estates will be exempt by 2010/11 is optimistic, adds Carolyn Steppler, director of private clients at KPMG. "It is worth noting that under Gordon Brown the number of estates paying IHT has nearly doubled from 18,000 in 1997 to 35,000 this year," she points out. The overall effect of these policies is that we're all paying more tax, says Julian Chillingworth, chief investment officer at Rathbone Unit Trust Management, both directly and indirectly. It means tax freedom day - the date on which workers effectively start making money for themselves - is due to fall on 1 June in 2007. Taxpayers worse off "Undoubtedly taxpayers in the UK are worse off than when Brown arrived," says Chillingworth. "This is due to the thresholds not moving with inflation, as well as indirect taxation on things such as cigarettes and petrol. Jiggling about with the amounts given to local authorities has resulted in them having to increase council taxes." Not only are we paying more tax, but it's increasingly difficult to know how much money we should be handing over, argues Mark Dampier, head of research at Hargreaves Lansdown. "From a personal finance point of view Brown has made things incredibly complicated because he's kept tinkering," he says. "The tax system in this country really does need a major overhaul." Dampier dismisses claims that the country is financially stronger as a result of Brown's policies. Look around the world, he says, and you'll find that most countries are far wealthier today than they were back in the late 1990s. "It wouldn't have mattered who was chancellor," he says. "You could have had a donkey in there and he'd have done the same thing. The reason why no one is moaning is that unemployment is low and house prices are going up, making people feel wealthier. But underneath there are some huge dangers." Public finances stronger His view is supported by analysis carried out by the Institute for Fiscal Studies for its 2007 Green Budget. If Brown does vacate the Treasury this year he will leave the public finances stronger than he found them, states the report, but he will have presided over a smaller improvement than those seen in most other industrial countries. Although public sector net debt is £80 billion lower than in 1996/97, 15 of the 22 leading OECD countries have reduced their debt levels by more than the UK over the same period. The UK still has a relatively big structural budget deficit. Brown has not encouraged people to save, insists Darius McDermott, managing director of Chelsea Financial Services. Increasing the annual individual savings account allowance (ISA) by a miserly £200 to £7,200 from April 2008, he says, shows the government's disjointed thinking on investments. "If the Chancellor really wanted to make a difference to how British people plan for their future he could have announced a significant increase in the ISA limit," he says. Anna Bowes, investments manager at AWD Chase de Vere, agrees that Brown has not been a positive influence in the investment world overall. "I imagine there are probably more losers than winners, because Gordon Brown is infamous for stealth taxes," she says. "In particular, you've got his failure to increase stamp duty thresholds and the fact that more people now have to worry about IHT." Winners So what will Brown's legacy be? Howard Reed, chief economist at the Institute for Public Policy Research, believes this will depend on how you have been affected personally. Many people will applaud his efforts as a redistributive chancellor who has succeeded in lowering child poverty.
The main winners over the last 10 years, he suggests, are families with children - particularly those on low incomes - and pensioners on low incomes. The losers include higher earners and people who regularly move house. "My overall view is that he's done pretty well," Reed says. "He's probably going to be remembered as a good chancellor." The Adam Smith Institute's Dr Pirie, however, is far less charitable. "It will be seen as an era of missed opportunities, a gradual wasting of the golden legacy that he inherited."
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