The numbers are alarming. Next year’s government borrowing is expected to reach £118bn, or 8% of GDP, “the highest level in post-war history”, says Edmund Conway in The Daily Telegraph. Roughly £20bn of that was added by what Chancellor Alistair Darling called “exceptional measures” to help consumers through harder times. So what are we getting for the money? Not much.
VAT will drop from 17.5% to 15% for 13 months. Darling hopes businesses will pass this on by cutting prices – assuming they can cope with what the British Retail Consortium calls the “mammoth and costly task” of adjusting prices down now and back up again in 2010. But even then, says Ernst and Young, many consumers may not benefit much. Fuel, power, children’s clothes, council tax and most foods are already exempt from the top rate of VAT. And separate duties levied on alcohol, tobacco and petrol will be raised to offset any VAT cut – so no Christmas cheer from Darling there.
What about other measures? As David Prosser notes in The Independent, families “on modest incomes, particularly with children”, and pensioners will gain in the short term. A rise in the income tax personal allowance, first announced in May to offset Darling’s abolition of the 10% starting rate, will be made permanent and raised from next April. The Treasury claims that 22 million basic-rate taxpayers will be £145 better off in 2009/2010 as a result. Then there’s modest child benefit rises – the amount for the oldest child under 16 rises from £18.80 per week to £20, and for subsequent children from £12.55 to £13.20. These increases will take effect in January rather than April.
The weekly state pension will rise from £90.70 to £95.25 and all pensioners are eligible for a single payout of £60, or £120 as a couple, on top of the existing £10 Christmas bonus. Those who can navigate the tortuous claims process will also enjoy higher pension credits, which rise from £124 to £130 for individuals and £189 to £198 for couples. But none of this tinkering “seems enough to return the economy to rip roaring growth”, notes Jeremy Warner in The Independent.
Homeowners also got a few concessions, although extending the stamp-duty holiday on homes worth under £175,000 is of little use in a falling and static market. And motorists, fuming from petrol-duty increases, had a small win on Vehicle Excise Duty, says Alison Chapman of Deloittes in the Daily Mail. Darling has revised the maximum increases for 2009 down to £5 on any car and down to £30 (from £90) for the biggest polluters in 2010.
All in all, not a lot to shout about. But the biggest problem, as Prosser notes, is that “most gains will be temporary” and “very rapidly wiped out”. We explain why below.
…And how he’ll claw it all back
Darling may be half-heartedly cutting taxes now, but it’ll all be clawed back. Aside from the reversal of the VAT cut in 2010 there are also hefty tax increases timed for 2011, when (so the Chancellor hopes) the economy is out of recession. He also intends to inflict most of this pain on the other side of a possible 2010 general election. So what’s in store?
First, there’s a 0.5% rise in national insurance (NI) from April 2011, which could raise over £5bn a year, says The Daily Telegraph. But for employees who’ll be grappling with planned changes to personal allowances and NI from previous budgets (such as next April’s rise in the upper earnings limit for NI contributions to just under £44,000), this is a “double whammy”, says Grant Thornton’s Mike Warburton. Someone earning £40,000 a year could be paying an extra £1,000 a year in tax by 2011, PricewaterhouseCoopers’ Clive Mackintosh tells The Guardian. Darling has lined up “a significantly increased tax burden for middle and higher earners”. There are more surprises in store for high earners. Personal allowances – which dictate how much tax-free income an individual earns – will be halved for those earning more than £100,000 a year from April 2010, and phased out altogether for anyone on £140,000 or more from April 2011. That could bring in £2bn. The highest rate of income tax will rise from 40% to 45% for those earning above £150,000, although this is expected to raise just £670m a year.
And wealthy savers face a further hit, due to what Investors Chronicle’s Moira O’Neill calls a “disaster for UK pensions”. The pension lifetime allowance (in effect the maximum tax-free private pension pot) is to be frozen at £1.8m for five years from 2011. Above that, tax is levied at up to a penal 55%. Not that what the Mail’s Michael Lea calls a “£2.3bn stealth tax” affects either Brown or Darling directly. They are protected by generous state-defined benefit schemes.