Profligacy with a purpose

Written by Nigel Herrick

Like a phoenix rising from the ashes of a prudent bonfire, Alistair Darling delivered a truly traditional left wing labour Pre-Budget Report, as he sought to follow his predecessors and tax the rich "till the pips squeak", by raising the higher rate of Income Tax and National Insurance from 2011.

It was the last unelected labour Prime Minister, Jim Callaghan, who finally admitted at a Labour Party Conference that "spending our way out of recession is no longer an option", but it seems his words have been forgotten by the latest incumbents of Numbers 10 and 11, as a return to old Labour political doctrines again take centre stage.

Whilst the tax rate changes may grab the headlines, the real story of the PBR is one of a growing mountain of debt, forecast to grow to £118 billion in 2009-10; falling only to a level of net investment by 2015-16, and then only if the optimistic GDP growth figures of a rebound to plus 1.5 to 2.0 per cent in 2010, are achieved. It is forecast that Public Sector net debt would also surge to 60% of national income by 2013-14, as we finally start to pay the price for the nationalisation of the workforce. No one has yet explained how this "road to Damascus" change in the fortunes of the economy will actually come about in 2010, but I will make a small prediction now, that if it arises, it will have had very little to do with a 2.5% cut in VAT!

The headline VAT cut - albeit temporary - will be completely lost and be absolutely unaccountable for as retailers slash high street prices, so we will never know if this so called stimulus was actually passed on or not. The increase in the top rate of income tax will only effect those earning £150,000 per annum on the face of it; but the added cut in the value of the personal income tax allowance for those with incomes above £100,000; and the increase in National Insurance (which will hit every working person), will mean that someone on a salary of £40,000 per annum will be over £1000 per annum worse off; and if your earnings are £140,000 per annum, you will be over £3000 lighter in the pocket. As all of these working people are also consumers, I fail to see how a tax time bomb such as this will help the economy, by exploding just when things are forecast to get better. It will be the first time since 1988 that Britain has had a tax rate above 40%, for that was the year that Chancellor Nigel Lawson reduced five higher rates going up to 60%, to 40%. In 1997 New Labour came to power on a "no change to income tax" mandate that has today been abandoned, as Blairite orthodoxy, and New Labour were swept away. In 1979 the top rate of income tax was even higher at 83%, but then only one in 40 people paid any higher rate tax at all, now one in 8 people will pay higher rate tax as we return to an era, not of the Blair philosophy of celebrating wealth - but one of penalising it. The beauty of the timing of the tax increases means that if Labour is re-elected, they can justifiably claim it to be on a tax raising mandate - which was already known; if they lose the next election however - they can just blame the new incumbents. The singer Kenny Rogers once sang that a gambler had to "know when to hold ‘em", and "know when to fold ‘em". May 2010 could be a good time to "fold ‘em" for Alistair Darling.