Monday, 24 November 2008

Stimulating times

Today's Pre-Budget Report is expected to see two flagship measures: a 2.5% cut in VAT and plans for a higher rate tax increase in 2010. The latter is intended to reassure people that the former will be funded and will not hit them, for the most part.

I wonder what the impact of these measures will really be. The VAT cut - advocated by Kenneth Clarke on Saturday - will reduce average household bills by a tenner a week, which is not unwelcome. But at a time when major stores are typically cutting 20-30% off their prices in unprecedented pre-Christmas sales, will the VAT cut be enough? I'm not always taken by Jon Cruddas's prescriptions, but his suggestion that all basic rate taxpayers get sent a cheque for £500 could have a more dramatic and targeted impact at similar cost.

As for the tax rise on those earning upwards of £150,000, it will not raise much money and will not really impact much on those having to pay it. But what is the message that it sends? I hope that Brown and Darling are right that in these post-Obama times, and such a rise is politically acceptable to middle England. The concern about raising higher rates in the past - when some lobbied for higher rates above £100k - was the fact that far more people believed they might earn such sums than ever had a realistic prospect of doing so, but £150k may be high enough to allay such fears.

Nevertheless, the government needs to be very clear about who will pay and what they pay; media reports erroneously make out that people pay 45% on their whole income rather than on sums in addition to the £150k. More importantly, the Chancellor will need to say more today about where else the money is coming from; he must not give the Tories ammunition to claim there are hidden taxes to come.

That said, the Tories' attitude to the crisis is utterly bizarre and a recipe for wholesale depression. One might debate the government's methods, but they are producing plausible policies. The same cannot be said for their do-nothing opponents.

No comments: