Bring back the 10p tax rate!

by Dr. Ros Altmann

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This week's Pre-Budget Report was hailed by the Government as proof that it knows how to help Britain through the coming economic difficulties. Nonsense. The reality is that these measures will make precious little difference. Let's be clear, nothing can stop the recession - only its length and depth are in doubt. Worryingly, however, policy errors could worsen the outcome.

The policies announced in the Pre-Budget Report are not what we need to put us on the right path. They are more like rearranging deckchairs on the Titanic as our economy sinks. Fine words and more public borrowing may help us feel better for a short while, but they won't solve the problems we face.

Abandoning its previous 'fiscal rules' and pumping up public sector borrowing to previously unimaginable levels, is a huge gamble with taxpayers' money and with the future of our economy. Government debt is spiralling out of control. Public sector borrowing will rise to an eye-watering 8% of national income next year and will stay at unprecedentedly high levels for many years to come. Next year's deficit forecast has jumped by £80billion since the Budget in March - if the Treasury can get things so wrong, can we even believe its new forecasts now?

The Government's plan is that temporary tax cuts today will be unwound after the next election. National insurance rates will rise for everyone, including the lowest paid and the temporary VAT reduction from 17.5% to 15% will be unwound in 2010. So just as we may start to emerge from a dreadful downturn after 2010, we will all be hit with increases in tax and national insurance! Giving with one hand and taking back with the other has been a hallmark of economic policy in recent years, but will not solve our problems. A new 45% tax rate and lower personal allowances will be introduced for the highest earners after 2011. This is a political gesture to certain interests but is unlikely to raise much revenue. Presumably it is a mere coincidence that these higher taxes will kick in just above the level of Cabinet Ministers' salaries!

The centrepiece of the 'fiscal stimulus' of this budget was the temporary VAT reduction, costing £12billion. This is unlikely to have much effect. Indeed, other countries such as France and Germany specifically ruled out cutting VAT in preference for more direct stimulus measures. When retailers are offering sales discounts of 30, 40 or 50%, cutting tax by 2 ½ % is a drop in the ocean. In fact, estimates suggest it will cost businesses around £300million to adjust prices, catalogues and bills for the new rates. And of course they will then incur further costs when the temporary cut expires. And many retailers will not pass on the reduction anyway. If their goods are priced at £9.99, they are hardly likely to reduce that to £9.74 to reflect the lower VAT.

Rather than wasting £12billion on cutting VAT it would have been far better to spend money on reducing income taxes, remedying some of the major unfairnesses of our society. Why not bring back the 10p tax rate which was so shamefully abolished by Gordon Brown last year? The Government has so far made three attempts to 'compensate' the estimated 5 million who lost out, with a variety of complex changes, yet about 1 million have still not been helped. Wouldn't it be simpler, fairer and more effective to just unwind the policy mistake and reintroduce the 10p tax rate? This would directly improve the incomes of the lowest earners, who are more likely to spend and would be far more effective in cushioning the blow of the recession than cutting VAT.

Another measure that we urgently need is to cut public sector waste. Total Government debt was already too high even before the credit crisis. But now, tax receipts and growth are falling, while spending is still increasing. Even more worryingly, huge sums remain hidden off balance sheet such as PFI (Private Finance Initiatives) and public sector pensions. We, as a nation, have been living beyond our means, so cost-cutting is essential.

Simplifying our tax and benefit system would remove the need to keep expanding public sector employment. We spend far too much on administering means-tested benefits and tax credits. Redeploying existing staff to cover the need for more job centre personnel would save significant sums in hiring new workers. Paying the pension credit to every pensioner over age 75, giving them £140 a week and ensuring they are not in poverty would be a far better way to spend public money than cutting VAT and giving pensioners a £60 'bonus'!

Until the Government understands why our economy is in such trouble, it will not be able to put things right. Our problems stem from economic and corporate policies that were designed to boost growth or profits in the short-term, by borrowing now and leaving the next generation to cope with the payback. The latest measures are more of the same.

Enough of the short-term thinking. Policy needs to consider more than the next few months. Some hard decisions are required. Is this Government up to the task or will it just keep trying to spend its way out of trouble without worrying about the long-term consequences? How long can the public be fooled into believing that spending and borrowing is 'the right thing to do'?

Just paying lip service to prudence is not enough now that the 'go-go' years have gone. I fear we will all pay the price for this Government's profligacy in the end.


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