Monday, 24 November 2008

Verdict on the Pre-Budget Report

The Chancellor today delivered his much awaited Pre-Budget Report, designed to act as a fiscal stimulus to mitigate against the looming recession. You can download the full Pre-Budget Report.

The key points of the Pre-Budget Statement were:
  • reducing temporarily the VAT rate to 15% with effect from 1 December 2008 to 31 December 2009;
  • introducing a new additional higher rate of income tax of 45% for those with incomes above £150,000 from April 2011;
  • increasing the employee, employer and self-employed rates of national insurance contributions by 0.5 per cent from April 2011;
  • increasing alcohol and tobacco duties, to offset the effects of the temporary reduction in VAT, maintaining these increases after December 2009 to support fiscal consolidation; and following a fall in pump prices of over 20 pence per litre from their summer peaks, a two pence per litre increase in fuel duty from 1 December 2008;
  • an additional £5 billion value for money target for 2010-11 and setting assumptions for spending growth from 2011-12 onwards;
  • making permanent the £600 increase in the income tax personal allowance announced in May 2008 with a further increase of £130;
  • bringing forward April's increase in Child Benefit to January, increases of the Child Tax Credit and a payment of £60 to all pensioners equivalent to bringing forward the April increase in the basic state pension;
The cut in VAT has been estimated to cost £12.5bn - yet, as Richard Murphy points out, very little of this is likely to be passed on to consumers, and even if it was it would make little impact as a stimulus to greater consumer spending. However, it will hit the Exchequer, and so an extra £5bn is being cut from public services. Understandably, the PCS union is concerned that further jobs will go - harming the delivery of public services. Mark Serwotka said, "the government needs to reverse its job cuts programme across civil and public services to safeguard their delivery. For example the government should be looking at tackling the £21.5 billion worth of uncollected tax and £25 billion lost through tax evasion, by putting more resources into HMRC to claw back the billions in lost revenue, which could be ploughed into public services and stimulate the economy."

As PCS points out each tax compliance staff member has a tax yield of £640,000 after employment costs. Why does the Government keep reducing staffing at HMRC when £21.5bn goes uncollected and £25bn avoided? If the Government serious about clamping down on tax abuse, we should look forward to the Crown Dependency Review. Richard Murphy is optimistic and maybe the pressure from Obama has finally made the Government act.

The new 45p tax rate is welcome, but as John McDonnell said is "hardly revolutionary" and "not enough". Why not 50% on £100,000? However, taken with plans to increase National Insurance and removing personal allowances for high earners, it looks like the Government is keen to fight the next election on making the case for tax rises!

However, the urgent question is will the fiscal stimulus work? This is doubtful. Despite some minor redistributive moves, the package is nowhere near enough to tackle this recession. Compare the scale with the bailout of the banks (when £50bn was handed over), how much is this package? £20bn, and £12.5bn of it is wasted in VAT cuts.

As John McDonnell concludes, "This is an expensive package which is not particularly well-directed, and is unlikely to have sufficient impact. It certainly will not recession-proof those hardest hit."

However, as McDonnell adds, "The Tories' response is woeful - they have no answers. Their plan to 'let the recesssion to run its course' would be a disaster."

Our job is to keep the pressure up on the Government to ensure they do not row back from these moderately redistributive steps, and that the Crown Dependency Review results in a clampdown on tax havens. Then there are the welfare cuts to campaign against, council housing (still off the agenda) to campaign for (get to the DCH conference tomorrow if you can), and bank nationalisation too . . .

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