The rumour mill is pulling 24/7 shifts. In recent days, newspapers and newswires have turned into gossip columns devoted exclusively to Alistair Darling’s Pre-Budget Report. If the rumours are true, which is a huge assumption, Darling will not offer the taxpayer a pre-election lolly-pop besides deferring the Age of Austerity until 2011, by which time he will probably be out of office.
If Labour’s 1992 manifesto was a tax bombshell, then by all accounts this PBR will be like Dresden. Everyone, both rich and poor, is in the firing line, and there is no space here to analyse every alleged proposal.
Darling looks likely to prolong the VAT cut until at least February, but Smith and Williamson expect VAT to rise to 20 percent in 2011. Each percentage point rise will generate £4.5bn in extra revenue, so a VAT hike is desirable and the Tories will almost certainly make a similar pledge. However, two huge caveats exist. Inflation is now the chief threat to prosperity and obviously a VAT hike exacerbates inflation. The government used to borrow its way out of trouble, now printing money has been added to its prescribed cardinal sins. Mixed with a VAT hike, the Quantitative Easing hangover could bring a return to inflation, as the graph below from CitiGroup suggests.
Second, there are rumours that Darling will review VAT exempt necessities like food. That any such measure is being considered discloses the full extent of Brown’s incompetence.
In an equally desperate attempt to raise funds, National Insurance contributions will apparently rise from 12.8 percent to 14 percent. How the private sector can recover under such pressure is beyond me. No single policy is a more apt illustration of why targeted tax cuts will stimulate industry and growth, and blanket tax rises will not.
If these rumours are true, the PBR will be a document enshrining quite how atrocious the government’s response to the recession has been. The tax rises reveal the lasting damage caused by Alistair Darling’s fantasia of forecasts. He will recognise that the economy contracted by 4.75 percent, not the 3.5 percent upon which his strategy was based. The likelihood is that despite 12 months of huge capital injections, GDP will have fallen from last year. The public sector has grown; therefore, the private sector must have shrunk by more than we imagine. The government’s efforts to rebalance the deficit will be inhibited as tax receipts continue to collapse and the employment market and private commerce stagnate. Even the most accomplished straight guy would crease when suggesting that the deficit by halved in four years. The time for radical cuts in income tax, fuel duty, national insurance and corporation tax, all of which would stimulate commerce, is now.
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