Taxing the rich is not the answer

HAS a Budget growth forecast ever started to unravel quite so quickly?In his speech last Wednesday, Alistair Darling had the embarrassment of revising downwards his forecast for Gross Domestic Product this year from the minus 1% predicted in his Pre-Budget Report in the autumn to minus 3.

HAS a Budget growth forecast ever started to unravel quite so quickly?

In his speech last Wednesday, Alistair Darling had the embarrassment of revising downwards his forecast for Gross Domestic Product this year from the minus 1% predicted in his Pre-Budget Report in the autumn to minus 3.5%.

Unlike the original forecast, this new figure had some appearance of credibility about it - or at least did until Friday morning when GDP data from the Office for National Statistics revealed a decline of 1.9% for the first three months of the year alone.

The scale of the fall caught almost everyone by surprise, and certainly Mr Darling since he had indicated in his Budget speech that the figure would be “similar” to the 1.6% decline seen in the last three months of 2008.

Even allowing for the fact that “similar” can mean “approximately the same” rather than “exactly the same”, it is still hard for Mr Darling to salvage any credibility (always allowing for the possibility that he has any credibility to salvage) from this shocking figure. The rate of decline will need to slow markedly in the second quarter if there is to be any chance of his minus 3.5% forecast being achieved.

Forecasts apart, the Budget was chiefly notable for what the Chancellor didn't do - that is, to take decisive action to improve the public finances. And what little he did attempt to do was wrong-headed and may well come to be seen as the moment when the “New Labour” experiment came to an end.

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The increase from 45% to 50% in the top rate Income Tax band proposed in the Pre-Budget Report for those earning more than �150,000 a year was itself something of a return to “Old Labour” but that is only the half of it.

The tapered withdrawal of the personal allowance on earnings above �100,000 means that some people will face an effective marginal rate of tax of as much as 60% - not as high as the effective rate went under Denis Healey's Chancellorship in the 1970s but certainly high enough to evoke the memory of it.

While taxing the rich will always go down well with the “class warrior” element, the result is likely to be counter-productive.

Imposing high taxes on the well off tends to drive wealth and investment elsewhere, and that means jobs going elsewhere too - jobs which might otherwise have been filled by unemployed British workers.

Another problem with taxing the rich is that, in the overall scheme of things, there simply aren't that many of them and, given the current economic crisis, the number is getting smaller all the time. The result is that such taxes don't really raise very much revenue.

Even the Government seems to have acknowledged this, if tacitly, in that the small print of the Budget indicates that the harsher tax treatment of pensions for high earnings will affect not only their contributions but also those of their employers.

Some believe this might prove the final straw in some cases and result in more final salary schemes being closed to further contributions, and that also stands to affect many more people than just the rich.