views

Don’t expect miracles from Darling

Allister Heath
THERE is just one thing going for Alistair Darling today and that is low expectations. Nobody is anticipating any miracles from the Chancellor, for whom this will probably be the last Budget, regardless of the outcome of the general election. His growth forecasts will be too optimistic once again, he won’t be open enough about the looming tax hikes and spending cuts – but then we are already unofficially in the middle of an election campaign. The bigger problem for Britain is not so much the policies to be announced today – it is what won’t be said and the measures that have already been agreed that are proving most dangerous. Take national insurance contributions (NICs), which are being hiked substantially. A paper by Andrew Lilico and Hiba Sameen of Policy Exchange shows that NICs are the most damaging possible tax to increase. The move will substantially reduce growth and employment. Lilico and Sameen also report that each percentage point rise in the total tax rate will cause a fall of between 0.05 and 0.2 percentage points in the growth rate of the economy, according to academic studies.

Other tax hikes are just as badly thought-through. The Centre for Economics and Business Research has suggested that the 50p rate will lose the government £800m a year and cost 140,000 jobs over time. However, a new book – How to cut public spending (and still win an election), edited by Matthew Sinclair and published by BiteBack – calculates that the effect may be even more disastrous. The Treasury itself says that taxable income elasticity – the percentage change in taxable income declared by individuals for each 1 per cent decrease in post-tax income – is 0.35 per cent. This means that a £1bn tax hike would in fact yield just £650m. Sinclair highlights research by HMRC which has suggested the negative effect on reported income may be even larger than the usual estimates, which rely on evidence from the 1980s when capital and high-earning labour were a lot less mobile – and they imply potential losses of revenue as high as £4.5bn in 2010/11. Darling’s decision to phase out high earners’ personal allowances and cut their pension relief will moderate this; but it is clear that the new top rate of tax – which kicks in next month – will hurt the economy without yielding much, if any, revenue.

In the 2009 Budget, the government set out plans to increase fuel duty by 2p per litre in September 2009 – from 54.19 pence per litre to 56.19 pence per litre – and then by another 1p per litre each year from 2010 to 2013. This is despite the fact that Britain already has the equal third-highest tax component for petrol and the highest tax component for diesel in the EU. Motorists are taxed at a far higher rate than the cost of maintaining the road network and the greenhouse gas emissions from road transport can justify, so any further taxes on motorists announced today would make the tax system even less fair and unnecessarily hike the cost of conducting business.

It will be worth bearing all of this in mind when the Chancellor gets up to deliver his speech this afternoon. All of the focus will be on Darling’s headline-grabbing initiatives, from more bank accounts for the poor to green investment funds, and on his dubious estimates for the budget deficit, national debt and GDP growth. Yet the real story is the cumulative errors made by the government over the past 13 years – today’s announcement is merely the bitter icing on a very nasty cake.
allister.heath@cityam.com