Thursday, 24 April 2008

on Gordon Brown and the legacy of spin

Is Team Brown even better at spin? Did they mastermind the entire 10p debacle?

The government’s sustainable investment rule states that borrowing should only be equal to or less than 40% of national income every year, for the 2008 budget
the level was 39.8% (opens in Power Point see pages 36 onwards). Let’s approach this figure with as little cynicism as possible (after all there was no statement on statistical errors provided by the Treasury). The Institute of Fiscal Studies has stated that with the inclusion of Northern Rock in next year’s budget this 40% rule will be breached. Why is Northern Rock being included in next year’s figures and not this year’s? Read on…

Let us return again to the
10p tax issue. It is estimated that to return the 10p tax rate would cost £7bn, so we can assume the government has made that much in taxes from scrapping the rate. Even if that is a very generous assumption it is worth remembering that the 0.2% that puts the government close to its 40% limit is the equivalent of £2.8bn in monetary terms. Put simply, the government has made quite a bit from doubling the rate from 10% to 20% for the lowest earners.

The interesting question is; did the government knowingly scrap the 10p tax rate so that it could meet its fiscal targets and save face? Gordon Brown initially argued that no one would lose out as a result of the scrapping of the rate; it then transpired that 5.5m would lose out and Alistair Darling has announced measures to help some of those 5.5m at some point in the future.

It is that final part that is the most interesting ‘some point in the future’. He today told MPs that he would wait until the pre-Budget report which is due in November to give details of the financial package and in a
letter yesterday to the Chairman of the Treasury Select Committee he said,
“As a sign of the Government's intent, we do not wish to wait unnecessarily
until November. Whatever conclusions we come to, all the changes will be
backdated to the start of this financial year.”
Effectively the government has bought themselves some time to find funds to cover the polo hole in their finances.

This is how they have done it, in November when the new packages are announced to help those who got slapped by the scrapping of the 10p tax rate, the cost of it will be limited by another item which has been delayed, the aforementioned Northern Rock nationalisation being included in the public debt, the two will be rolled into one and the fact that the 40% rate has been smashed will be played down by playing up the nationalisation of Northern Rock.

If the government breaks its fiscal rules now by reinstating the 10p starting rate, it will be embarrassing and could have quite extreme effects on the price of Sterling on the world markets, if it breaks it in next years budget then two excuses could be used depending on what happens over the next 11 months:
The world economy gets worse and this is used to blame the breaching of the 40% fiscal rule or
Northern Rock is sold the proceeds of which may offset the ‘financial packages’ offered to low earners in the November Pre Budget report (remember not all 5.5m will benefit from these packages and things like the increase in the winter fuel allowance could return to normal levels in next years budget).

The government has weighed the embarrassment of breaching fiscal rules on one hand, with that of getting more tax in the interim period.

Lets not forget that due to the
multiplier effect on public spending and the fact that a lot more people just received a tax cut from 22 to 20p the government will be making more money in the long run, if those who received a tax cut save this then it will help to cushion the credit crunch for banks plus get taxed for investment income, if they spend this then the government can collect indirect taxes on it such as VAT, Corporation Tax etc. A clever move as it will allow them to appear as heroes in November when they repay some of those who lost out.

And you thought Blair was good.

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