Friday, May 16, 2008

The 10p debacle - why the bleeding won't stop

It's all become like passing the scene of an accident on a motorway. As people drive by, they can't help but slow down to look at the grisly sight of wreckage and perhaps the odd smear of blood. Voyeuristic, I know, but human nonetheless.

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Alastair Darling, having been given one of the worst 'hospital passes' of recent years, understandably concluded that silence was the best approach to dealing with his inheritance from Gordon, and it would probably have worked but for the misfortune that at least one opposition party was on the ball. The calculation wasn't difficult to do, but the fact is that either it wasn't done by the Government or, worse, it was and they ignored it. It does, I admit, puzzle me that there was silence from the Labour benches, but they probably took their eyes off the ball celebrating the reduction in the basic rate of tax to 20%.

And so the demands for a fix, and a quick one at that. Worse still, the Conservatives were allowed to claim that they were standing up for the disadvantaged. Chutzpah, I admit, but a fine example of the art of opposition.

I have to admit that the solution is a pretty elegant one. By reducing the threshold for the 40% rate band by £1200, higher rate taxpayers do not benefit, whilst most of those who had lost out are compensated in full. There are some additional beneficiaries, like myself, who earn between £18,500 and £40,000, who benefited from the reduction in the basic rate and now benefit from the enhanced personal allowance but we won't complain.

The downside is that we have a government that is on the run, and everyone knows it. £2.7 billion to fix what might charitably be described as a mistake is not a promising start in rebuilding economic credibility and the package has an impact in future years in terms of income tax take. Of course, the Chancellor might be planning to claw it back, for example by not increasing allowances or rate bands with inflation next year, but everyone will be watching now, and such slight of hand will be harder to get away with. Besides, if we shout loudly enough, it will probably be overturned anyway.

The Conservatives and ourselves will be pecking away at the weaknesses in Labour's taxation strategy, knowing that in an increasingly complex tax system, the scope for unintended consequences grows almost exponentially. It isn't even necessary to offer a concrete alternative, as very few people will understand the concepts requiring grasp. On the other hand, cries of unfairness will have Labour's Treasury team running for the hills.

Finally, there is the question of the additional borrowing. There is now very limited manoeuvre in terms of borrowing is concerned if the various 'golden rules' are to be adhered to and, in a recession, an inability to pump-prime the economy could bring dire consequences for jobs and for those juggling large mortgages and other debt.

Credibility, once lost, is often elusive to those trying to recapture it. For the time being, Alastair resembles someone trying to catch an elephant with a butterfly net. And time, my friends, is not on his side...

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