Taxes and Tax Credits - how bad will the Budget be?

If you looked at the headlines this morning and didn't actually buy a paper, you would possibly feel sorry for the 2 million families who were going to lose their tax credits thanks to the evil Government.

Let's just put this into perspective. At the moment your household can earn up to £58,000 and still qualify for £545 a year. The papers are suggesting that this threshold could now be cut to £25,000 r £30,000.

We have to see the detail of George Osborne's budget next week, but I would hope that what would actually happen would be closer to how I wrote about it last month. The Liberal Democrat policy was for tax credits to be cut back for higher earners at the same time as raising the tax threshold to £10,000, taking many people out of tax altogether and giving everyone else an extra £700 per year. So, if that is implemented as we envisaged, the families who would lose £545 would gain £700 per taxpayer, a net gain of at least £155. The tax threshold rise was going to be paid for by taxing capital as income.

It's never been a secret that tax credits for higher earners were going to be cut back by the Coalition - it's in the agreement and in the programme for Government as well as both party's manifestos.

I'm sure there will be some compensatory raising of the tax threshold in the budget, but, because of the Daily Telegraph and some Tory backbenchers foaming at the mouth over the capital gains issue, I suspect that it may not be as much as we would like.

The Programme for Government says that:

"We will announce in the first budget a substantial increase in the personal allowance from April 2011 with the benefits focused on those with lower and middle incomes"

That has to be positive - and much more so than we could have expected from the Tories governing alone. That raising of the tax threshold is vital because it helps to deal with the poverty trap, which means that people are better off on benefits than in work, trapping them in a life that they really don't want to be in.

And if there are any scare-mongering Labour types reading this, don't you dare say that tax credits are being abolished - those who need them most, who get several thousand pounds a year will continue to get that vital help.

While the budget will bring news that we may not want to hear, I suspect that it will not be as bad as the press and Labour are suggesting. However, I have a horrible feeling that it may not be as good as the Liberal Democrats had intended. It bothers me that policies designed to be implemented fully in tandem may not be and the effect, not for the very poorest, but for those on a household income of around £30,000 might end up in them losing out. These are not rich families by any stretch of the imagination. If Osborne raises VAT as well, then they will lose out with that as well. That's a tax most Liberal Democrats really don't like because it's so regressive.

I don't think that next Tuesday is going to be a comfortable day for anybody except maybe for rich young men in suits in the City who may just feel confident enough to stop us falling deeper into the economic mire. Is this not a completely bonkers way of running an economy? Why should our futures depend on whether some rich young men (because they mostly are) are feeling confident? Why can't wellbeing feature in these calculations? I'm not suggesting that we become some sort of Socialist republic because that's pretty horrible too. There must be a better way, though, a way which encourages and rewards good ideas, enterprise, increased wellbeing and sustainable decisions.

UPDATE: the lovely and wise elephant has explaind the Capital Gains issue in very clear terms.