Pre-Budget Report

Browns Bombshell

On Monday Alistair Darling delivered his much anticipated Pre-Budget Report. This was undubtedly the most important set of announcements for the UK for many many years but what are we to make of it?

In it the Chancellor announced a cut in VAT of 2.5% as the main means to stimulate the economy, as well as giving pensioners a £60 Christmas payment. Taxes on all earnings above £150,000 a year will have to rise to 45% in three years time to cover the cost in the long term, whilst there will be similar rises in national insurance payments. Alcohol, tobacco and fuel taxes are all also expected to rise to offset some of the cost of the cuts. The economy was predicted to shrink 1.25% in the coming year but is expected to exit recession by the end of the financial year 2009-2010.

First if all I think we should recognise that a cut in VAT of 2.5% means bugger all to the average consumer. Essentially a cut in 2.5% on everday products isn’t going to constitute a great deal of savings, except on larger purchases such as cars. What then is the point of such a tax cut? It doesn’t seem that it is going to get people rushing out to spend their money as people are currently too wary of doing so. For many shops and restaurants these cuts might represent a brief respite from falling profits but only if they don’t pass the cuts on as cuts in the prices of their products. I’m not a believer in the country spending its way out of a recession but if you’re going to do it, do it properly!

Labour’s actual long term response just seems to be – increase the tax burden. I can’t help but feel that we are going to head into a spiral of increased national debt combined with increased government spending leading to increased taxation; forcing the wealthier away from the UK. This is classic Labour and although not nearly as extreme as the Labour fiscal policies of the 1960s and 1970s, it does seem that unless we tread carefully we are going to be heading that way.

As for their predictions on the recovery of the economy, our recent poll, allbeit mostly of students going on hunches, suggests that the slump may last longer. Most people actually thought that the slump would last roughly a year longer than the government has predicted. If that were to be the case, we wouldn’t just be looking at a government borrowing of £118,000,000,000 but something even higher. I hope that we are wrong.

For further insight in to the cut in VAT these articles might be interesting:

http://blogs.telegraph.co.uk/angela_monaghan/blog/2008/11/24/prebudget_report_vat_cut_will_guarantee_deflation

http://www.guardian.co.uk/business/2008/nov/24/pre-budget-report-consumer-affairs

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