I’ve been wondering for a while now how much the shortfall in stamp duty will be this year, given that house sales could be down 40 per cent and prices 10 per cent.  

Lord Oakeshott, the Lib Dem Treasury spokesman for the Lords, has an estimate of £5bn, down from £10.1bn in 2007/8:

To put this in perspective, it’s almost DOUBLE the £2.7bn cost of compensating the abolition of the 10p tax band.

True, the Treasury did forecast in the Budget that stamp duty receipts would fall…..by about 5 per cent, not 50 per cent. Soon we’ll see who is right.  

Oakeshott makes the astute point that as property prices fall, buildings enter lower stamp duty bands, accentuating the effect.

You might argue that the Treasury will be compensated by rising oil prices, which result in higher VAT at petrol pumps and more North Sea Oil tax. Unfortunately, officials were knocking down this theory a few weeks ago (see Blogs passim).

The Treasury is not happy with the idea that it could scrap its proposed 2p increase in fuel duty AND its new tax on gas-guzzling cars - and still beat the relevant revenue forecasts by more than £4bn if oil prices stay at their current highs.

Here is the theory of Maurice Fitzpatrick, senior tax manager at Grant Thornton, the accountants:

Tax revenues from North Sea oil would jump from an estimated £10bn - struck when oil was only $84 a barrel - to £16bn at the current price of about $128 a barrel.
Since the Budget in March, the Treasury has already taken an estimated £820m more than its forecasts in North Sea oil tax.
The £6bn of surplus revenue would easily cover the cost of U-turns on both fuel duty and vehicle excise duty, where ministers are introducing new bands which could cost an extra £200 for drivers of inefficient cars.
Deferring the 2p increase in fuel duty by six months would cost £550m. Scrapping the revamped vehicle excise duty altogether would mean the loss of an estimated £465m next year and £735m next year - although ministers may only remove the retrospective element of this tax.  

But Number 10 has disputed this, saying this afternoon: “The Treasury has always made clear that the impact of high oil prices on public finances tends to be revenue-neutral over the long-term.”

Here is their argument:

The increased revenues from oil when prices are high are offset by a number of factors including:

 *   an increase in pump prices leads to an increase in inflation.  This knocks through to the inflation-linked payments that the government has to make, including benefits, pensions, tax allowances, and government bonds.

*   reduced demand for fuel from filling stations, which reduces revenue from fuel duties - as this is fixed at 50.35p per litre if people buy less fuel, revenue from this falls.
*   receipts from profits made by North Sea oil companies have in recent years been to some extent offset by capital costs, and the costs that have been rising for plant and machinery and labour costs too.

So there is a net offsetting effect.

That is the theory, anyhow.

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?

Forget affordability. The toughest problem facing Treasury officials may be finding a way to make timely payments to some of the 5.3m households that are set to lose out from scrapping the 10p rate.

The rub is that if officials choose to keep Gordon Brown happy by using his cherished tax credits system, the lucky losers identified for compensation may be waiting for up to 18 months for their backdated cheque. This would coincide with the much heralded plans to raise the minimum wage, which will not come into force before October 2009.

I’m not convinced voters will be understanding about such a long wait.

Here is why it could take that long. The tax credits system is cumbersome and hard to manage. It works on an annual basis and is fiendishly difficult to adjust mid-year in any significant way. Monthly payments are set at the start of the financial year in April. A process of “reconciliation” then takes place in September, where overpayments and underpayments are calculated. (About 2m families are told at this point to give money back to the government because they have been overpaid. Great politics.)

A best case calendar for extending tax credits to those low-paid workers without children would look like this:

• November 2008: Alistair Darling announces the changes
• Jan/Feb/March 2009: People apply for tax credits for 2008 (effectively backdated payments) and 2009
• April 2009: Monthly payments begin that compensate for both the 2008 and 2009 financial year

A more realistic scenario was outlined to me by Ian Mulheirn of the Social Market Foundation, who wrote an excellent review of the options available to the chancellor.

“Amending the tax-credit system to assist these people would only take effect from April 2009 and any backdating in respect of 2008 would probably take another six months,” he told me. Basically, the backdated payments for 2008 would be calculated when it comes to “reconciling” the tax credit payments in September 2009.

This would effectively mean that even those lucky few chosen to receive compensation would be out of pocket until October 2009.

Is that a message that will win votes on the doorstep?

A far simpler and much quicker alternative, advocated by the Institute for Fiscal Studies, is to increase income tax allowances, a measure Gordon Brown has criticised in the past because it is more regressive than tax credits. Changing the income tax schedule was not mentioned by the Treasury in its letter outlining the 10p rate U-turn.

The question is: will the prime minister swallow his pride and admit that tax credits are not the best solution to his compensation puzzle?