Budget glossing... over the not-so-nice bits like RPI v CPI

24 March 2011

don't think this is the inflation he meant, but it is full of hot air...

You may have heard the Chancellor mention yesterday that he was changing the inflation measure used for inflation from RPI to CPI. You possibly just thought he couldn’t spell.

However, in reality it is a bit, well, naughty, and we are thoroughly back in the giving-with-one-hand-but-taking-away-with-the-other arena.

Before I can explain, the difference between the two is more than just a letter. In simple terms (because I know you well enough by now) both have our notional basket of goods (remember I told you about them last week?) but RPI also includes variation in housing costs, so is consequently a higher figure.  An announcement that allowances (including ISAs and CGT annual exempt amount) are to increase by a smaller figure then, is kind of like the opposite of a tax cut. Although it can’t be a tax raise, as George said it wasn’t a tax raising Budget. The oil companies and banks may beg to differ.

Of course, a handily timed ‘leak’ to the press (there I go being cynical again. Tsk) that next year’s personal allowance will go up by £670 to £8,105, meant that everyone was talking about how much tax they would *save* on the morning before the Budget, rather than working out the long term not-so-pleasant effect that increasing year on year by a smaller amount gets you. Compound interest anyone? Not that anyone isn’t pleased about the personal allowance increase you understand, especially as next year’s will not have an associated reduction in the higher rate tax level, unlike the one announced last year. You know, the one creating an extra 750,000 higher rate taxpayers in April...

Here at BitterWallet, we champion the consumer, even when the consumer is a reluctant taxpayer, and we like to point out these small flaws. Or spin, whichever you prefer. And we hope you’re grateful.

TOPICS:   Tax   Government

4 comments

  • PaulH
    I didn't understand any of that but from your general tone and humour level, it cant be good.
  • The B.
    It was very much a New Labour budget wasn't it? The middle classes got screwed again (the middle class now include an extra 750k working class as you pointed out).
  • Grumbly
    ISA's were not linked to any index previously, increased (or decreased) at the whim of the chancellor - so CPI is better than nothing!
  • The C.
    Given the government inflation target is based on CPI, represents all UK households (ie doesn't exclude pensioners!) and it'll probably include house prices going forwards (see http://www.ft.com/cms/s/0/35ca2dce-e78b-11df-b5b4-00144feab49a.html#axzz1Hh1cTAGn and www.statistics.gov.uk/downloads/theme_economy/cpi-rpi-information-note.pdf) it's probably a fairer representation of UK inflation.

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