Tax cuts - a bungle rather than a bung
Alistair Darling flips his 10p coin and instead of tails, 5m people lose, it is heads, 22m win. Yet Darling emerges as a loser either way. He has dug a large hole to get himself out of a small one and he now needs to dig an even bigger one to extricate himself from the latest tax changes. And despite his largesse, he has received no glory.
His predecessor at the Treasury - now the prime minister - cut the basic rate of income tax to 20p and abolished the 10p band, but when it took effect in April 2008 the government received all the flack for the abolition leaving 5m people worse off but received no thanks for giving everyone else the lowest tax rate for 75 years. In expressing their opinion of the tax move, even the majority that gained financially allied themselves with the minority that lost.
There should have been a lesson there that applies to change of all sorts, from re-arranging the office furniture to rebranding products: that the appreciation of the positive is outweighed by the disappointment at the losses.
Now to appease the tax losers - or 4m of them - Darling has given a tax cut to 22m people. That ought to be an occassion for rejoicing but the effect is lost in the politics of why the hand-out has been made. When people have to pay an extra £120 tax that is an enormous sum; when they receive it as a tax cut it is regarded as measly. If the one-off cuts are restored next year there will be howls: expect more climbdowns as they are extended, therefore.
It is because the downside always seems larger than the upside that politicians should resist change. Instead of winning votes, the cash hand-out has lost the electorate’s support.
To borrow to give a tax cut is economic madness but there are redeeming points. Chaning the tax allowances is better than mucking about with the minimum wage to compensate the 10p losers, which was the previous month’s idea. Debt is not ideal but it is not disasteerous either, and by asking higher-rate taxpayers (who gain nothing from the tax changes) to help repay it, Darling is unintentionally redistributing income.
And the £2.7bn being borrowed will boost the economy. The US government has just handed out a tax cut to boost its economy and Darling might just justify his tax reduction on that basis (though it might mean admitting the UK is near to recession). Instead it is a fudge to cover up the previous fudge. It is a bungle rather than a bung - and it is not the way to run a nation’s finances.
