10p tax rescue package could cost £4.5bn

10p tax rescue package could cost £4.5bn

Gordon Brown was facing renewed pressure last night over his rescue package for low-paid workers as a new report showed that the government's compensation package could cost as much as £4.5bn - up to 10 times the amount earmarked by the Treasury.

As the Tories warned that the government plan was unravelling, new figures also showed that not all of those hit by the abolition of the 10p starting tax rate would be compensated.

Labour backbenchers, who backed away from rebelling against the budget in the commons next Monday after the Treasury unveiled a compensation package, warned last night of further trouble if the government fails to offer compensation for the 5.3 million families hit by the abolition of the 10p rate.

Lynne Jones, the former ministerial aide and MP for Birmingham Selly Oak, told the BBC: "Alistair Darling and Gordon Brown know only too well that it would be foolish to betray the trust of MPs." Her remarks came as Darling faced pressure on two fronts:

Advertisement starts

---

---

Advertisement ends

· A report by the Social Market Foundation found that it would cost £4.5bn to "help all the groups in the chancellor's letter". This figure was estimated by Ian Mulheirn, the SMF's chief economist, who worked at the Treasury until recently, and who qualified his figures by assuming that there was a takeup of only 50-60% of those affected;

· A calculation by the Institute for Fiscal Studies that 2 million out of the 5.3 million families affected by the abolition of the 10p rate would be compensated by the chancellor's new package, which offers help to 60- to 64-year-olds through an increase in the winter fuel allowance, an increase in payments to low-paid workers without children by changing the tax credit system and a review of the minimum wage to help younger workers.

George Osborne, the shadow chancellor, said: "These new figures show that the measures hinted at by the chancellor could still leave over half the 5.3 million families hit by the 10p tax rise worse off. How typical of Gordon Brown that when you look at the small print of a U-turn, it turns out to be a con."

The Tories forced the government on to the defensive overnight by claiming that only one element of the package - the increased winter fuel payments - would be backdated to the start of the financial year this month. Darling attempted to clarify the position by telling the Commons that he would "offset the average losses".

Frank Field, the main Labour rebel, who backed down from an attempt to amend the budget in the Commons next Monday, said he was satisfied. "The intention always has been to backdate the different packages that will be devised to April this year. There is some legal reason in the Treasury that terrifies them about using the word backdate."

But the Institute for Fiscal Studies said that 2 million would be compensated at a cost of £3bn. This breaks down as:

· £200m to increase the winter fuel payments by £230 for half a million 60- to 64-year-olds. There would be 4 million gainers but only half a million would be losers from the abolition of the 10p rate;

· Tax credit changes in which the age limit is cut from 25 to 16, the hours requirement is cut from 30 to 16 and there is an increase in the rate of the tax credit availability to single people without children by 50%. This would cost £2.8bn and reduce the number of losers by 1.5 million.

guardian.co.uk © Guardian Newspapers Limited 2008