Will the PBR help the economy?

Graham Dines

POLITICAL Editor Graham Dines wonders if a £10 VAT cut on a £400 laptop really will stimulate the economy.

HEADLINE grabbing tax gimmicks have been loved by Chancellors of the Exchequer throughout the ages. This year, Alastair Darling has had what is probably the most difficult task since James Callaghan devalued the pound by 14% in 1967.

We are facing a world recession of epic proportions. Prices are all over the place, but even though petrol hikes are now in retreat, the cost of living for the average Briton is increasing, especially the cost of food, while unemployment is on the increase.

Faced with falling house prices, negative equity, and jobs uncertainty, families are not spending their cash on household goods and cars.

This in turn leads to manufacturers cutting back, which has a knock-on effect on their suppliers, most of whom are small businesses.

It is against this background that Alistair Darling has set out his Pre Budget Report in the Commons this afternoon.

I say Alistair Darling, but it must be obvious to everyone that the strings are being pulled by Gordon Brown, for 10 years the Chancellor who has been burning up the air miles these past couple of months with a plan to save the world from economic catastrophe.

There would be much to admire in the Prime Minister's browbeating of other world leaders but for one inescapable fact: by international recognition, Britain's economy is one the worst placed among the leading industrial nations to deal with the crisis, despite claims to the contrary by the Government.

Public borrowing has been spiralling out of control. UK net debt as a share of the gross domestic product will be 48% next year, then 53% and 57% in subsequent years.

To be in debt to the level of 57% of our gross domestic level means the public finances are in their worst state for more than 30 years.

Labour's investment in the public services since 1997 - and goodness only knows, they needed it - has been paid for not out of direct taxation, but through borrowing on a massive scale.

Chancellor Darling this afternoon announced another spending splurge. There'll be £3 billion for capital projects on the motorway network, new social housing, renewing schools and energy efficiency measures, will be brought forward from 2010/11 to this year and next.

Measures to bail out British banks caught up in the toxic sub-prime mortgages fiasco - and if the Government had not acted, at least one bank and two building societies would almost certainly defaulted and gone bust - has added to the nation's record debt.

Today the Chancellor tried to stimulate the British economy. He introduced an immediate, but temporary, cut in VAT from 17.5% to 15% - which is the minimum rate allowed by the European Union - and announced that this would be paid for in part by a post-election increase in taxes for everyone earning more than £150,000.

Spending our way out of a recession is a high risk strategy. It needs the public to go on a buying binge, but already there's opinion poll evidence that householders will be cautious. Here's why.

A laptop might have been high on many people's Christmas present wish lists. One costing £400 before tax would retail at £470 when VAT is added at 17.5%. Cut the VAT to 15% and the cost only goes down by £10.

A £10 cut is not going to encourage many hard-pressed families to go out and buy. The Chancellor's giveaway is marginal at best.

VAT is purchase tax on transactions by another name. If you don't buy anything, you don't pay the tax and so you're no better off.

But unlike income tax, the main advantage of reducing VAT is that the change in rate is almost immediate. It comes into effect on December 1 and lasts until January 2010, when the rate reverts to 17.5%.

To partially compensate for the loss of revenue, there will be a corresponding rise in tax on alcohol, cigarettes and petrol “which should keep the overall cost to consumers the same this year” said the Chancellor.

This year's increase in the income tax personal allowance of £120 a year for basic rate taxpayers is to be made permanent and increased to £145 in April, helping 22 million basic rate taxpayers.

All rates of National Insurance contributions are to rise by 0.5% from April 2011, but the starting point for NI is to be aligned with that of income tax.

A new rate of income tax of 45% introduced from April 2011 on incomes over £150,000, which will affect 400,000 people including footballers and city traders, and there won't be many tears shed for them.

From April 2010, those with incomes between £100,000 and £140,000 will see the value of their personal allowance reduced to get the same benefit as a basic rate taxpayer and for people with incomes above £140,000, the full value of the personal allowance is to be withdrawn

It's estimated that around 400,000 people will be affected. Gordon Brown currently earns £189,994, putting him easily over the limit for the new higher rate assuming he remains Prime Minister after the election. By contrast, Mr Darling is paid the cabinet minister's rate of £138,724, leaving him just below the threshold.

And Tony Blair will be well and truly caned, if reports that he has earned £12m since leaving Downing Street are to be believed.

The measures which will genuinely help the less well-off came at the end of the Chancellor's statement to MPs. The state pension for single people will rise from £90.70 a week to £95.25 next April. The increase in child benefit will be moved forward from April to January.

The pension credit will increase from £124 to £130 a week for single people, the chancellor says.

Mr Darling says the new vehicle excise duty bands will be phased in. The maximum increase next year will be £5.

Apart from the economy, the Chancellor is also the main architect of Labour's success or failure at the next election. In brutal terms, Labour MPs will be waiting anxiously for the next batch of opinion polls.

Chris Mole, MP for Ipswich, called it “the right response to the global credit crunch. The government has acted to provide much needed fiscal stimulus to the UK.”

Will the public be convinced enough to boost Labour's chances? Or will they support the Conservative line that there is a “tax bombshell” lurking in the undergrowth, a charge so devastatingly and successfully levelled by John Major against Neil Kinnock in the 1992 election campaign?

Opinion polls show that Brown and Darling are more trusted by the voters to get the UK out of the mess than their Tory counterparts David Cameron and George Osborne.

Whether that translates into election success will depend on whether the Chancellor has done enough in the short-term to ensure voters entrust Labour with the long-term.