“Extraordinary action” was what Gordon Brown promised his Chancellor Alistair Darling would deliver in the latest pre-Budget report. Having happily allowed a credit-fuelled housing and consumer spending boom to run its destructive course until the credit crunch struck last autumn, Brown and Darling are now attempting to take a more pro-active approach to the bust. “Simply letting recession run its course, to say there is no alternative, is not an option” argues Brown.
But are the proposed measures as radical as they would have you believe? Here’s a summary of the key points for consumers.
Pre-Budget report: the ‘fiscal stimulus’ is smaller than expected
In the end Alistair Darling’s proposed package of measures to stimulate the economy was smaller than some expected. He estimates the total cost at around £20bn or 1% of GDP, against some forecasts that he might have thrown all caution to the wind and gone for something nearer £30bn.
The reason quickly became clear – the parlous state of public finances. Darling expects GDP growth next year to fall to between -0.75% and -1.25%. In one fell swoop, said the BBC’s Nick Robinson, he thereby delivered the biggest downward revision to a Treasury annual growth forecast ever. And that means much lower tax receipts from both individuals and companies.
So the government will have little choice but to borrow – big time. Borrowing will reach £78bn this year, nearly twice the level forecast in Darling’s last report, and will hit a massive £118bn in 2010. Indeed overall government borrowing is forecast to keep rising until 2015/16.
In spite of all that, Darling managed to keep a straight face when he said “the UK economy faces turmoil in a position of relative strength”. Relative to what – Iceland? Ambrose Pritchard Evans reckons that on the strength of Darling’s numbers UK public finances will soon be close to “banana land” territory.
Pre-Budget report: VAT to be cut from 17.5% to 15%
One of Darling’s headline-grabbing measures was well trailed before the announcement – a cut in the rate of the UK’s sales tax, VAT, levied on many good and services from 17.5% to 15%. The cut will stay in force for 13 months from the start of December until 2010. This measure is designed, in short, to get us all back into the shops and spending, stimulating the businesses that make and sell the stuff we buy.
But it will do nothing of the sort. The trouble is, as Professor Hermann Simon, Managing Partner of Strategists Kucher and Partners puts it “high-ticket items will benefit from this (VAT) relief in a much higher proportion in absolute pound terms. Saving one or two pounds on a product is not going to bring shoppers in or lead companies to invest. However, saving a hundred pounds on a TV and IT hardware or thousands on a car definitely will”.
So beyond a few big spenders – perhaps the ones targeted by Darling’s proposed rise in income tax (see below), it’s doubtful whether this measure will have any meaningful impact on most of us. After all retailers are already discounting like fury – Marks & Spencer for example has already been running “20%-off” offers more than a month before Christmas to boost flagging sales. What’s more duties on petrol, alcohol and tobacco will increase to “offset the VAT reduction”. As such Simon, summarises the VAT measure as “absolutely ineffective”.
Pre-Budget report: capital spending
The other big element of Darling’s economic boost was supposed to come from £3bn of spending on motorways, social housing, schools and energy efficiency being brought forward from 2010/11 to this year and next. All well and good if you’re a public sector employee. But the tax increases planned to pay for all this don’t look so clever for some in the private sector.
Pre-Budget report: income tax rises
In an attempt perhaps to demonstrate his Robin Hood – take from the rich to give to the poor – credentials, Darling proposes to pay for some of this VAT cut by introducing a new highest rate of income tax of 45% on those earning over £150,000 from 2011. That’s anyone in the top 1% of incomes. The personal allowance for those earning over £140,000 is also set to disappear.
There are at least two problems with all this. First off its implementation at all rather presupposes that Labour will be re-elected. Otherwise some of today’s tax cuts are effectively unfunded. Secondly it sets a dangerous precedent. The clear message is that those who produce and earn income should pay for tax cuts for those who choose to spend instead. And given that those targeted are “the sorts of people who can arrange their affairs quite imaginatively” as PriceWaterhouseCoopers John Whiting puts it, “it’s unlikely to raise a huge amount of money”. Indeed the measure is “worse than a waste of time” says Douglas McWilliams, CEO of the CEBR think tank – a chunk of the estimated 200,000 affected will either move abroad or spend less. And the Treasury would have caught far more people when “the bonus culture was alive and well”.
Pre-Budget report: national insurance increases
It’s not just the well off who will be in for a shock. The Chancellor clearly expects the economy to be growing strongly by 2011 – national insurance is expected to rise by 0.5% for both employees and employers. Darling had better be right about the economy as this is hardly an incentive for firms to hire more staff.
And the good news?
Predictably Darling went for some measures that look superficially at least to help the UK’s poorest. His embarrassing reversal of a proposal to do away with the 10% tax band is to be made “permanent”. Meanwhile pensioners will get a one-off payment of £60 from January or £120 for couples with a small increase in the overall level of pension credits. Nice but not much consolation to those retiring as annuity rates plummet, taking many retirement incomes down with them.
Homeowners will also get a little bit of respite – major mortgage lenders have agreed to wait three months after a borrower falls into arrears before taking possession. However that will merely delay, not take away, the day of reckoning for many, given the 12% rise in mortgage arrears reported last month.
Finally a new Saving Gateway will be set up so that from 2010 those on low incomes will get 50p added for every £1 they save. Trouble is in the midst of a recession most will be focused on survival rather than building a nest egg – even with a government sweetener.