Friday, 28 November 2008

A hard taxing week, Horatio!

Readers of this column know that I am not a great fan of the Government’s economic and taxation policies, so may well be expecting me to take another swing at the Chancellor and his organ-grinder boss. However it is true to say that my disappointment at the content of the Pre-budget Report given last Monday by Mr. Darling is not because I would oppose any of his policies on principle, but because I truly believe that the measures announced are not the right ones, and that they are again treatment of the symptoms of the economic malaise, and not of the underlying cause or disease.

There were announcements of increases in benefits such as Child Tax Credit from January instead of April, and additional earlier payments to State Pensioners, and this type of thing does put money into the economy, though it will very likely have to go towards higher fuel costs compared with this time last year, and help pay off any overspend at Christmas. However, the disappointing reality is that many people are very hard up and pretty much all the increase in benefits is likely to be mopped up.

Of course there is the very tight squeeze on credit following on from the banking crisis, and I am not going to rehearse the background to this other that to say it might have been a lot less serious if the Northern Rock crisis had been addressed properly in September 2007 when it came to a head, and not at the beginning of 2008. There is however a shortage of money to spend, which is why I am confused as to the thinking behind cutting the main VAT rate from 17.5% to 15%, albeit in time for Christmas, with a guaranteed rise in Employers’ and Employees’ National Insurance from 2011. Naturally the latter rise will raise billions towards the borrowing the Government has embarked on to spend its way out of this mess but to me it highlights muddled thinking.

We all agree that there is not enough money being spent to keep the economy going and keep people in work. However, surely the cut in VAT on what will be largely imported consumer goods relates to voluntary expenditure which people anyway are reluctant to make. It might save a few retail jobs in Currys (though DSG are not doing so well) but what people really need to spend money on is food and fuel. Food is zero-rated for VAT purposes and domestic fuel and electricity keeps the 5% rate. I suppose the thinking is that people will spend money on those things because they have no choice, but the logic behind increasing the duty on vehicle fuel to compensate for the VAT cut makes not much sense even in a twisted green world. What it will do is increase the price of food because it will be an extra expense on the food retailers who could recover the input VAT but not the fuel duty.

The decrease in VAT on the imported items will be offset by the higher import costs because of the decline of the pound as a result of the economic downturn, so in cutting the VAT rate, Mr. Darling bears more than a passing resemblance to Don Quixote. Not a pretty sight!.

What scares me is the terrible price we are going to pay. The VAT cut will be very expensive for the Exchequer, and will be one reason why the NIC rate is going to go up in a couple of years if Mr. Darling has his way. The fact is that tax does have to go up, but as NIC is such an easy tax to manipulate I am at a loss to understand why it has not been used as a tool now.

If instead of cutting VAT, Mr. Darling had cut NIC at least for next April that would have given most employees and immediate boost and if Employers NIC had been cut that would have been a help to the cash flow of small businesses who are still the backbone of the economy, even if the Chancellor does not understand them. Oh, yes, losses can be relieved back three years now for tax purposes, but many small businesses cannot sustain losses for long in this climate and any sole trader with significant losses would most likely be stacking shelves in Tesco (not that isn’t an honourable job) rather than soldier on with negative money for any length of time.

The trouble is that for small business it is on the whole jam tomorrow. Small companies have to make the losses and wait for repayments down the line; it does not help them now. Never mind, the corporation tax rate for any small company making a profit next year is staying at 21% in April rather than rising to 22% as had been intended; a year’s reprieve. Now, only a couple of years ago the rate was 19% and I have never read any justification, official or otherwise, for the increase in the small companies’ corporation tax rate. Increases in allowances for plant etc. are generous this year and the ongoing rates are also reduced, but they assume that companies have money to spend. If they do, they had best spend the money on marketing, because there are opportunities still if business owners remain positive.

I just wish that the Chancellor and his cohorts had thought about the real world, not cutting taxes on imported goods that may be out of our price range now anyway. You cannot pull money out of people’s pockets to spend it on what they don’t need if the money isn’t there. We need early concerted action to cut the cost of all our mortgages (surely the banks want to retain control over their destiny rather than succumb to what John Prescott called Old Labour policy c 1947) because that is what is needed to help revive the economy. Otherwise the whole “cash injection” looks misdirected. An NIC cut would have been so useful, and more immediate than the VAT effect (if any) even if it could not happen until April.

I guess the lesson is that it is more important to be doing something positive than to jump about appearing to be doing something. I say this more in sorrow than in anger, because I would love the Government’s strategy to work for all our sakes. I just fear that we will pay the price without ever seeing the goods.

© Jon Stow 2008

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