May 14, 2008
Did Darling pay too much?
There is one statistic that really hammers home how expensive the 10p U-turn is. About £2bn of the £2.7bn in compensation is going to those who had already won from the 2007 Budget. Officials insist this was the only simple and quick solution. But there was another way that was cheaper and more comprehensive.
Ian Mulheirn, chief economist at the Social Market Foundation and a former Treasury official, thinks he has the answer. He believes the chancellor could have compensated all those who lost out for just £1.5bn. By contrast, the chancellor’s plan was almost twice as expensive but only covered 80 per cent of the 10p rate losers.
The main downside would be losing any political benefits from the bung to middle England. Indeed, that may be the reason it was not pursued.
The alternative involves raising the income allowance by £1,100 and tapering (or gradually reducing) the additional allowance away as a person’s income reaches 19,000. Mr Mulheirn calculates this would fully compensate the 5.3m losers for 1.5bn in a targeted manner. There would be no additional benefit to those higher up the income scale. The main downside is that it makes the tax system more complicated (but so did raising the allowance mid-year).
The graph below shows how this proposal compares to what Mr Darling proposed yesterday. The effect of the 10p rate is in blue, Mr Darling’s proposal is marked in red, and Mr Mulheirn’s is in green. The green line is clearly fairer to the poor. Was Gordon Brown was offered this solution? And did he decide against it?
The government should have introduced a gradual annual increase of the lowest tax band to ease some tax payers into adjusting to a higher tax rate, instead of shocking the poorest of the poor with a sudden surge in tax burden. Abolishing the 10p when the economy is slowing is simply a foolish decision, punishing the most disadvantaged people, struggling with mortgages and inflation.
Personally, I think what the government did by offering the said rebate is merely a a short-term appeasement and vote-buying scandal in the making.
The Labour government has shown how dangerous and vulnerable a recklessly high spend and high tax economy can be and the situation can only degenerate further as the economy worsens. It’s really caught itself in its home-made strawberry jam!!
The only solution is gradual reduction and improvement of efficiency of public spending, something a bureaucracy and red-tape ridden Labour government is clearly incapable of!
Posted by: Alan | May 14th, 2008 at 9:59 pm | Report this commentInteresting post, but unfortunately the graph is too small to interpret properly. Any chance of putting in, or linking to a larger one?
Posted by: Ian | May 15th, 2008 at 6:25 am | Report this commentThe simple fact is Labour has splurged too much money on unproductive, inflated and failed public sector spending initiatives. Performance standards across the public sector are vying with those of slovenia, slovakia and italy.
Labour’s default position is for state monopoly providers and statist solutions to any problem -this is both fantasist and self serving for Labour party vested interests.
Britain needs a top down replacement of leadership (including throughout the public sector) - and Labour a generation in opposition to reflect and renew.
Posted by: Steve Bell | May 19th, 2008 at 9:29 am | Report this comment