Darling's solution could prove costly, say economists

Darling's solution could prove costly, say economists

Alistair Darling's mini-budget to compensate 5 million people for the abolition of the 10p tax band will add to the red tape burdens of small business, push public borrowing towards £50bn this year and put the government's fiscal rules in jeopardy, economists said last night.

Against a background of a slowing economy, the chancellor said in his budget two months ago that the Treasury would need to borrow £43bn this year to bridge the gap between spending and tax revenue.

Yesterday's emergency package will add £2.7bn to the borrowing total even if Darling's economic forecasts - considered optimistic by most independent analysts - turn out to be correct.

Darling said it was "right and sensible" to allow borrowing to rise as the economy slowed, noting that Britain's debt was low by international standards.

"Our fiscal policy, like our monetary policy, is designed to support stability in these uncertain economic times generated by the turbulence in world financial markets and global commodity price inflation. I am able to finance this proposal through borrowing this year, ensuring that we do not take money out of the economy at this time."

Peter Spencer, economic adviser to the Ernst & Young Item Club, said: "To offset the effects of the abolition of the 10p tax rate is going to be very costly and it comes at a time when they have no money. The cupboard is completely bare.

"Gordon Brown should have used the strong.....continued below

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economy to reduce borrowing, not ramp up spending. The national debt is just below the 40% of national income level and it looks almost inevitable that it will bust it. The chickens are coming home to roost at exactly the wrong time." The Institute for Fiscal Studies said that although Darling had said the tax changes only applied for the current year, it would be "astounding" if he subsequently cut the basic rate tax threshold, hurting those he was seeking to help.

As a result, said senior research economist Mike Brewer, the chancellor had now used up "all the wriggle room" he had on his rule that net debt should not exceed 40% of national income.

"He has not broken the rule yet but is very close to doing so. The problem is that he has announced several one-offs in recent months such as the postponement of the fuel duty rises," he said.

Raising the personal allowance benefits all income tax payers, and yesterday's measures were crafted to make sure that those in the highest income bracket were left unaffected. To do this, Darling reduced the threshold at which the 40% tax band kicks in by £600. Under the proposal, the first £6,035 of earnings will be tax-free and the basic rate of 20% will be payable up to £40,835.

Despite cutting the 40% threshold, the exchequer still loses revenue as a result of the changes because there are more basic rate taxpayers than top rate taxpayers.

Jonathan Loynes, of Capital Economics, said: "This seems like a pretty crude response to the problem. The cost in terms of lost tax revenue is estimated at £2.7bn per annum, which is pretty small beer compared to total annual revenues of almost £600bn.