Darling’s Statement (with added liveblog)


3:23 pm - November 24th 2008

by Unity    


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Today’s the big day – the Chancellor’s pre-budget report and the announcement of the government’s fiscal stimulus package – and as Iain Dale noted, yesterday, right-wing bloggers have already been out in force in what some might well consider a fairly desperate attempt to grab hold of the news agenda in advance of the Chancellor’s statement.

The carrots have already been extensively trailed over the weekend;
a 2.5% cut in VAT;
a new 45% tax band for individuals earning over £150,000 a year;
a planned increase in vehicle excise duty scrapped;
more time for business to settle up with to ease cash flow worries;
and a three month ‘grace period’ for people who’ve fallen behind with their mortgage seem to be the main points thus far.

But even with that one the table, its difficult to work out what the likely economic impact will be until we get the full picture. Nevertheless, some of the underlying political thinking is already quite clear, as is much of the direction that the right-wing’s efforts to spin this as a tax bombshell waiting to drop will take, even at the expense of disregarding some pretty basic economics in order to put over their arguments.

The proposed new 45% tax band for high earners is, it has to be said, a pretty obvious bear-trap for the Tories but one that Cameron will find incredibly difficult to avoid. It’s a simple enough scenario – when the economy is growing and the majority of people in gainful employment is seeing their living standards rise along the economy, then its easy for politicians to be entirely relaxed about some people getting seriously wealthy in the process even if this skews the overall distribution of wealth in society towards the top end. When the economy turns in the opposite direction, the political dynamics of the situation alter and public perceptions shift markedly on the issue of what constitutes a notionally fair distribution of wealth.

So, bringing Robin Hood back in from the cold and taxing the rich to give a little more money to poor looks a pretty solid move with only 18  months or so before there has to be a general election – assuming Gordon decides not to cut and run before hand – particularly as the precise configuration of the new band (45% on income over £150,000) leaves most of ‘Middle England’ untroubled by the new rate and David Cameron with a major headache.

In the circumstances, if a Labour Chancellor is looking for a way to put the squeeze on the Tories, then this is the way to do it.

With government policy now moving more in the direction favoured by Vince Cable who, more than any other senior politician, seems to have come through the last year smelling of roses, and Cameron coming under pressure to execute another mid-term swing to the right from his own rank and file, Clegg may be left with much less room for manoeuvre in the event of a hung parliament, particular if Cameron does succumb to pressure and move towards a more obvious Thatcherite policy direction on the economy.

That said many commenting on the VAT move seem determined to ignore basic economics, like John Redwood:

It’s not fair on the poor. Essentials that make up most of the budgets of the lower paid are already VAT free. The biggest gains will be for those who buy expensive wines, flashy cars and use lots of petrol.

So, the biggest gains will be the people who ‘use lots of petrol’? Like, perhaps, the Road Haulage industry whose costs have a direct impact not on just on the price of luxury items but on the costs of basic foodstuff and other zero-rated staple items.

Give or take a few exemptions, changes in VAT, which is levied on both business to consumer (B2C) and business to business (B2B) transactions, run right the way down the supply chain. Couple this with the recent falls in the price of oil and you’ve got a sizable reduction in supply-side costs that, when it works its way through the system, will result in lower consumer prices even on zero-VAT rated items.

There’s more to cutting VAT than just a few quid of that plasma screen TV you’ve been eyeing up as a christmas present for yourself, and while a mere blogger, like Dizzy, could be forgiven for neglecting to consider where and how a cut in VAT might filter into and down the supply chain and lead to lower consumer prices, Redwood is supposedly one of the Tory right’s main economic ‘gurus’, which suggests that his comments are either straightforward party-politicking or simply that he’d forgotten to put his thinking head on when he knocked up that post.

The other great unknown on which there’s been much speculation and relatively little common sense is the proposition that this package will inevitably result in significant tax increase within a couple of years – after the next general election.

Before getting too caught up in dire predictions of future tax hikes let’s not forget that if, between its support for the banking industry and today’s fiscal stimulus package, the government does turn around the economy is relatively short order then what we may have when we start to come out of the other is very low interest and inflation rates and a growing economy delivering rising tax revenues.

This is where the complex economic calculations come into play, and we’ll have to wait to see the exact numbers that the Chancellor puts up to see how this is all factored into his calculations, but the ‘deferred taxes’ equation is nothing like as simplistic a matter as some suggest – if the government can hold down any increases in public spending to a level below the rate of growth in the economy, and tax revenues, that while things will be a little more austere in the public sector than they were when the government were riding the bubble, the tax rises necessary to offset the costs of this stimulus package may not quite so severe.

———————-

Okay, it’s getting on for 3:30 and the Chancellor will be on in about 10 minutes, so I’ll leave it there in terms of commentary, although if I’m not interrupted I may continue to live blog the Chancellor’s announcement on this post, so feel free to use the comments to add your own reaction.

15:25 – Okay, first bits of live-bloggy goodness, and apparently Cameron told the CBI, earlier today, that:

“They might be talking about tax giveaways but everyone knows that they’re throwing money at us now to take it away at a later date.

“To pay back all this money would mean an 8% rise in income tax, or a 6% rise in VAT, or a corporation tax rate of 71%.”

So, as D-Cam fancies himself the next PM and if he wins the election he’ll be the one having to do all the taking back, which of these option is he suggesting will feature in the Tory’s general manifesto? 8% on income tax, 6% on VAT or the corporation tax rate of 71%?

Come on, Dave, if you’re so keen on spelling out the options, you might at least tell us which one you’d choose…

Oh, and time a for quick video, and what could be more appropriate than a bit of Blackadder Goes Forth, and the scene where Darling gets sent to the front-line…

15:30 – And we’re off… Darling is also clearly following in the great tradition of Our Glorious Leader/Ex-Chancellor by reeling off a shedload of statistics and generally boring the House into submission…

Meanwhile the natives on the opposition benches are clearly in a restive mood…

15:35 – Told you they were getting restive – Michael Fabricant gets a telling off from the Speaker after five minutes…

15:40 – Aww crap – someone’s just shown up – must take a break…

If anyone want to takeover for a bit, feel free…

17:04 – Right, the inconvenient bugger’s gone, let’s get back to Darling’s statement and…

Okay, what we’ve got on the table in the carrots column is…

2.5% off VAT for 13 months
£3 billion in infrastructure projects pulled forward
An extra £130 on income tax allowance to go with the £600 announced in May, which is being made permanent.
Increase in child benefit pulled forward by three months, an increase in child tax credits and an extra £60 for pensioners.
Deferrals on increases in vehicle excise duty, air passenger duty and small businesses corporation tax rate.
A £1 billion lending guarantee for banks lending to small businesses.
A cuddly toy.
A fondue set.
An “additional £1.3 billion to continue delivering effective support for the unemployed
to find a new job” – yes, that was pig that just flew past the window,
Some largely unnecessary guff about mortgages (more on which in a moment)

And in the sticks column…

45% tax rate after the next election on incomes over £150,000, but the sneaky one here is cutting the personal allowance by half for those with an income of between £100,000 and £140,000 a year and removing it entirely for anyone earning more than £140k, which amounts to the equivalent of 1% on the basic rate for someone on £100K and nearer 2% for someone at £140K who loses the allowance entirely.

0.5% hike in employees and employers NI after the next election.

£5 billion ‘value for money’ target – is that really the last spin for that. Didn’t it used to be ‘efficiency savings’?

The VAT reduction on ciggies, booze and petrol will be offset by additional duties, and

Of, course, most of the tax breaks as deferrals or temporary cuts, which will kick back at a later date.

Have I missed anything?

I need to mull over a few things, but a couple of basic points that are worth making…

Okay, so the compensatory rise in duty on ciggies and alcohol is hardly a surprise, but I’m so way short of being happy with the increase in fuel duty, for the reasons I outlined above – without the fuel duty increase, a cut in VAT on petrol, and especially diesel, would have filtered down the supply chain into lower prices on the bare necessities of life and benefited those on low incomes, even if that relationship is maybe something less than obvious when compared to the £5 off a TV line.

But then, that’s part and parcel of politics, surely. Even if the effects of a particular measures are not screamingly obvious, its the job of politicians to sell the idea to the public as either a good or bad thing, depending on which side of the fence you’re coming from.

Mind you, its interest to note that even with the 2p on fuel, the government are projecting a £180 million loss on the fuel side of things, which sounds about right on current average pump prices, where the 2p duty increase is a little more than the values of the cut in VAT on unleaded but a little less when it comes to diesel, so hauliers will be making a little some of the deal, just not as much as they might have done.

The other point worth picking up is the whole mortgage ‘grace period’ thing. which is no more than a load of irrelevant tosh dressed up a policy.

I’ll dig out the full details, including the case reference, and write it up in the next day or two but, in essence, there have been a legal precedents in place for several years which go much further in helping people sort out mortgage arrears than anything the government have put up, making Darling announcement little more than the bit of old rope put up in the hope of conning people into thinking that its something that they’ve put up money for.

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About the author
'Unity' is a regular contributor to Liberal Conspiracy. He also blogs at Ministry of Truth.
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Reader comments


Lol, that live-blog went well!

I don’t think Darling will pull out any more rabbits out of his hat, TBH. The govt needs an economic narrative than simply some gimmicks, because they wouuld backfire really quickly.

Give or take a few exemptions, changes in VAT, which is levied on both business to consumer (B2C) and business to business (B2B) transactions, run right the way down the supply chain.

But don’t businesses reclaim VAT anyway?

Yeah, work – the curse of the blogging classes

Rat’s cocks. With the VAT drop from 1 December, that’s any firm with monthly billing targets, um, inconvenienced.

[troll]
Just another anti-Tory rant. You know when the fascist left are building up to returning to Labour when they start increasing the anti-Tory rhetoric. It gives them the excuse for another X in the box for the Party that lied to the nation to take us to war.

But don’t businesses reclaim VAT anyway?

Yes, but as business add ‘value’ to products as they move down the supply chain, there’s almost always a differential between the amounts of VAT collected and the amounts reclaimed, which the Treasury pockets, so a reduction in VAT will still have a knock-on effect down the chain.

I’m not entirely convinced pushing consumption is a good idea, though I like the idea of reducing VAT and increasing tax on top earners. The Tories don’t even have a policy, let alone a narrative.

Sunny:

It all depends on the kind of consumption we’re talking about.

As I’ve mentioned, I’d have at least liked to have seen the VAT cut on fuel left to stand for diesel without a parallel hike in fuel duty because that reduction would filter down the supply chain to reduce the cost of foodstuffs by cutting transport costs within the UK.

Factor in the recent direction that exchange rates have been running, which makes imports more expensive, and you’ve got a tidy little fillip for British farmers whose produce will become more competitively priced by comparison to imported produce.

Darling has written down the fuel duty hike as a green tax, which is a little questionable as I see it as because although reducing the cost of diesel will theoretically increase the carbon output of British hauliers this should be offset by a reduction in carbon outputs generated by importing produce from overseas.

Yoghurt, just a quick mention that your blog seems to be swallowing comments at the moment.

Unity

Isn’t there still rebated heavy fuel for farmers anyway?

“Red diesel”

If VAT is lowered it will effectively lower the price point of goods and services at no cost to the business.

[Economics 101] Sales will increase, yet margins will remain the same* leading to increased profit.

*Unless marginal costs are relevant. In which case it’s even better for the business.

Actually I think Sunny makes the most salient point ::

I’m not entirely convinced pushing consumption is a good idea

Indeed, people need to start reducing their debt, not being enticed into spending even more.

I don’t think Unity’s point about food is particularly relevant, personally. That is not the market Darling is trying to stimulate. He’s going after the high street. He knows that many jobs are reliant on till receipts at M&S, Currys, and Woolies. This is where the cuts target.

The government is stuck between a rock and a hard place. The evil that is excessive borrowing must be sustained to protect the millions of jobs that’ll be shed if the downturn continues to gnaw at the high street retailers.

The Treasury fucked over manufacturing last year, when it cut taxes on businesses (inc. banks and financial services) yet clawed back the revenue with a cut in the capital expenditure allowance – which disproportionately effected the manufacturing industries.

Heh for a second there today I had this mental image of Christmas shopping grinding to a halt when people thought VAT was gonna mean cheaper products.

It’s a pissy little amount that wont be felt in real terms by people. And seriously, how businesses (especially small ones where the cost to admin this change may be prohibitive) are really going to pass on any saving to us?

(especially small ones where the cost to admin this change may be prohibitive)

As a former accountant, I would assume – in most cases – it’s merely a mathematical change at the Excel or SOP stage with regard to admin. I suppose there is some re-pricing costs that will be happily shouldered by companies keen to drop prices (even slightly).

Bit of a con to put it mildly; the VAT reduction is worth not alot and for people on lower incomes it will be wiped out by hikes in petrol, alcohol and tobacco duty.

It was a political pre-budget…i bet the odds on a 2009 election just got cut sharply…

Things to think about:-

B2B pricing is ex VAT so a change is simple but B2C is inclusive of VAT. Are you, as an example, expecting ARGOS to re-issue their catalogue to drop 2p in the £? The same applies to many retailers. In practice the VAT reduction may get absorbed into sale prices.

There will also be confusion with the public who may expect a 2.5% price drop when the reduction in sale price is little over 2p

Companies collect VAT at point of sale but pay later, this provides an effective interest free loan, used by many to aid cash flow. Reducing VAT reduces the value of that delayed payment.

A drop of 2p per litre of fuel for the delivery of goods is insignificant in the total cost of products and would never realistically be passed through.

Yes, as #17 – I haven’t seen it mentioned anywhere else but surely menu costs for altering the rate of VAT will be significant?

I am afraid it won’t be so easy for many businesses, especially retailers and wholesalers that operate on tiny margins. I know one manufacturer that I use to work for, who will have to change the individual costings set-up on several thousand lines; a lot of work for a “temporary” measure. As pointed out by most sensible commentators, retailers are already offering massive discounts to get stock moving. This VAT reduction will have little impact. Markets and businesses have already reacted to the recession. The Govt can do little. Its efforts are purely political. As ever Labour is putting Party before Country.

If Brown & co were serious about helping the public, he would start reducing his commitments to foreign aid, including the £800m he’s promised a country that has the World’s richest man and would rather waste money on a space programme than feed its poor.

It seems to me that the best thing Darling could have done (cf Chris Dillow) is raise Jobseekers’ and the Personal Allowance by 50%. Everything else seems like fiddling around at the margins – and it would have made a better headline, too!

even at the expense of disregarding some pretty basic economics in order to put over their arguments.

Well if you think you understand it basic hardly covers it . I look forward to the war being over by next May as per Darlings predictions given the uncanny precognition of New Labour thus far what could possibly go wrong ?
No mention of debt , supply side or the pitifully small amount as yet pencilled in to pay for all this .
Unity , like most of them , obviously believes there is a magic money tree and magic creditors who don`t mind people who are unable to repay loans .
Oh Sunny , bwefore you delete this I am going to be really mean and reveal THERE IS NO FATHER CHRISTMAS

( Ain’ I despicable )


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