Posted by: secretperson | November 25, 2008

The Emergency Budget

As I have said before, I am no economist, but I am unconvinced by Alistair Darling’s pre-budget review.

VAT is to be cut by 2.5 percentage points to 15%. That is a 2.1% drop in prices, if shops pass it on, and is designed to encourage spending. We are currently coming up to Christmas and shops, in order to attract customers are offering their own sales to encourage spending. Please do write in if you say any store with SALE 2.1% OFF signs. The market will cut prices and encourage more spending than Darling’s VAT holiday. I am not really complaining about a tax cut, but I can’t see it having the desired effect. Plus it will be offset by duty rises in alcohol, cigarettes and fuel.

National Insurance will rise. Now we know Gordon Brown has raised NI contributions before, while not raising income tax. But, of course, NI is an income tax, it is a tax based on your income. This will hit the middle classes more, which may please the left, but won’t help start spending. The poor who spend most of their income on essentials have little room to manoeuvre in adjusting spending levels, neither will these essentials be affected by the VAT cut.

Income tax will rise to 45% on earnings over £150,000. This could raise £3bn, which is better than nothing but small change in the total budget of nearly £700bn. And sometimes raising taxes can reduce tax take, especially amongst the highly mobile rich, but this particular initiative will likely have little effect beyond cheering the Polly Toynbee’s of this world who dislike high earners (despite belonging to said group).

Public spending growth will be cut. Not public spending cut, just the rate of increase, this despite the economy predicted to shrink by 1.25%. Borrowing will rise to £118bn, and that’s just the official borrowing figure, the real total may be much higher.

So despite some tax rises, borrowing will still be enormous. The tax rises will be delayed till after any election, for obvious reasons. By the time these rises are set to come in, we could be recovering from this downturn or still emersed deep in recession. When combined with the inevitability of higher tax long term to cover increased public debt costs, it looks like more borrowing and spending and delaying the inevitable pain.

But the pain will come. Gordon Brown might avoid the personal pain of an election loss this time if he can borrow enough on our behalves to ring-fence the public sector and collect their votes, but the pain will come eventually. And it’s really going to hurt.

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Responses

  1. “This will hit the middle classes more, which may please the left”

    I doubt it. Much more pleased about the top-rate – which only applies to 2% of the population. Even Thatcher didn’t have a problem with high-earners paying a 60% rate!


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