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Smart move - or desperate measure

26 Nov 08

It’s too early to say whether the package of fiscal measures to boost the economy in Alistair Darling’s Pre Budget Report represents bold but astute action, or a reckless gamble with all of our futures.

The PBR, unveiled on Monday, was all about giveaways: a 2.5 per cent cut in VAT, a permanent reduction in income tax for the lower paid and a raft of measures to help pensioners, families with children and small businesses, and others besides.

The bad news is that it’s us who are doing the giving - that is to say taxpayers will be paying for it, but not yet. It was a smart political move to announce a higher rate of income tax for those earning over £150,000. As a major shift in “New” Labour’s political commitments, it distracted attention from the fact that taxing the rich is not going to be enough to pay for this package. More significant is that fact that national insurance contributions will go up by 0.5 per cent from 2011, representing a higher tax on income for all or most earners. Even worse, it is a “tax on jobs” for employers who may, even by 2011, be reluctant to staff up again to pre-crunch levels.

If the Treasury forecasts for economic growth are correct, and the Exchequer returns to a balanced budget by 2015/16, this week’s measure will look smart in retrospect. If not, we’re simply digging ourselves deeper into trouble.

One point of view I’ve heard expressed is that attempting to get consumer spending and the housing market back to where they were two years ago is not the answer. We should admit that we have been living above our means and accept that we’ll have to take a hit to our standard of living for the next few years.

That does seem a bit harsh to me. But I can’t quite shift the nagging doubt that we are just hoping the government can support an unsustainable level of consumption and asset prices, when the banking system clearly could not.

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