Despite the so called austerity measures, the UK government is still spending way beyond its current income and is adding to the public sector national debt of 1.1 Trillion Pounds (£1.111.4 billion) total in December 2012 at an alarming rate – £121.6 billion in 2011/12 alone. (A trillion is a billion, billion or £1,000,000,000,000 – a one-trillion stack of £1 notes would stretch 70,000 miles.)
What most people don’t realise is the government is not actually planning to reduce the national debt, just the year-on-year deficit. In fact the cuts package is targeted to increase the national debt by around £600bn by 2015, a measure needed to boost and sustain economic growth.
This is not the whole story though; if you include all the public sector intervention, including the bailing out of banks, private finance commitments (PFI) and other obligations such as public sector pensions into the future, net UK public sector debt is somewhere in the region of £2.3 trillion pounds (£2311.6 billion). Add private debt to that amount and you are looking at somewhere in the region of £10 trillion.
This rather frightening public debt figure amounts to over 70% of GDP (147.3% if you include intervention) – almost one and a half times what the country currently earns per year, and interest payments on the debt alone for 2011/12 are likely to be in the region of £48.6 billion – more than we spend on defence.
Of course, all governments have some debt and a basic underlying structural debt remains even in the good times, plus the UK is not the most indebted country, but right now, if debt is held within the planned targets it will be around £1.5 trillion by 2016.
Granted the proportionate UK debt burden was heavier after World War II, but as with all loans, if the money is not used wisely, we end up borrowing more and more until we go bust – the taxpayer and future generations are the ones that ultimately pay the price. This current year that burden will grow again by a forecast £138 billion.
Money was wasted in the good times as politicians bribed voters with endless amounts of unearned (borrowed) cash; none of us really cared what the government was spending when the finance industry was falling over itself to lend, in what is now clear was a massive Ponzi scheme, but now we will all pay the price.
Future generations won’t be happy when they realise just how much their futures have been mortgaged by the state. Their average living standards are likely to be well below those of the “baby boom” generation, and with the “demographic time bomb” of an aging high dependency population, high energy costs and low productivity growth, this is unlikely to change in the near future. But if we fail to grow the economy those providing the loans will lose faith in Britain, with quite profound consequences for our currency, our country and our standard of living.
So far the money markets have kept the faith in the measures the government is taking to get the country out of recession, keeping interest rates low, but this won’t last without signs of progress and there’s still a real possibility of the UK losing its “triple A” credit rating this year.
If the government is unable to gradually reduce the budget deficit (current income less expenditure) by growing the economy without savage cuts, there is no choice but to raise more money from taxes, plus relying, over time, on inflation to slowly wipe out some of its debt obligations. Officially running at 3.3% (RPI Jan 2013) and predicted to remain above the Bank of England 2 % target for some time to come, we all know that realistically some of us are experiencing inflation well above this official level.
As far as the authorities are concerned, property owners are “low hanging fruit”. They are there for the taking – a target for tax revenue – because it is easy to collect from those stuck with an immobile investment. You can’t send your buy-to-let portfolio off-shore, not that you would want to.
Anyone who is lucky enough to own a holiday (second home) or homes for holiday lets will come in for scrutiny by local councils and HMRC over coming months as they trawl their nets for those who have undeclared income or capital gains, and many councils will begin to apply council tax the full rate even when properties are vacant. Further, many holiday let owners will no longer be able to claim business rates relief on sale and for inheritance tax (IHT) purposes.
As far as property owners, pensioners and investors generally are concerned, some quite alarming proposals are coming out of Whitehall.
In the most extreme example, the Liberal Democrat party is putting forward suggestions for a whole raft of punitive tax measures, including the levying of national insurance on pensioner incomes, additional death taxes plus property “super taxes”.
The Liberal Democrats, now along with the Labour opposition, have been calling for a mansion tax on properties worth over £2 million for some time. The idea was somewhat watered down by the coalition in favour of a 7% stamp duty on homes worth £2 million or more, but there could be more pain to come?
The Liberals have now set-up a working group to look at whether they should back a property “super tax” that would cover all assets, not just a single home but including second homes as well. Their plan for the property super tax forms the basis of a consultation paper to be put before the party’s spring conference.
The proposals being put forward include:
• A mansion tax on properties worth £2 million or more, including taxing those with multiple properties with a cumulative value of over this amount.
• Reducing the annual pension tax relief from £40,000 to £30,000 and the lifetime allowance from £1.25 million to £1 million.
• Introduction of national insurance contributions on pensioners’ earned income.
• Extend the period for gifts becoming exempt for inheritance tax purposes from seven to fifteen years.
• Levying capital gains tax when assets are sold after death, currently assets are not liable to CGT when the owner of the assets dies.
• Introduction of a land value tax, including a charge on under-used sites, to try and reduce property prices.
• Reform of council tax to try and differentiate very expensive properties.
• Extend national insurance contributions to benefits in kind.
• Increasing the tax-free personal allowance to £12,000.
There is even a proposal from the Lib Dems for a net wealth tax, a so called “jewellery tax”, but business secretary Vince Cable has dismissed this as “wacky” and “completely impractical”.
Despite the fact that many of these proposals will probably never see the light of day, this tax grab trend is worrying for asset holders.
We will no doubt see more on how this trend is developing in the budget next month. We will be reporting on the budget in our March LandlordZONE Up-date.
Tom Entwistle, Editor – comments to email@example.com