Between the Lines: Stitch in time, or too little too late for high street?

Published on Monday 24 November 2008 20:50

CHRISTMAS is coming and tax is being cut? Prime Minister Gordon Brown has turned to old adages in the run up to the Pre-Budget Report (Pre-Budget Report ), which was being heralded as a "stitch in time to save nine" for the UK economy – a shot in the arm when it needed it most.

Christmas is coming: well, that was certainly the intention for consumers and retailers alike with the cut in Vat rates from 17.5 per cent to 15 per cent – the lowest permitted within the constraints of European Union law.

The intention of short-term measures such as this – together with the permanent increases in the individuals' personal allowances and other actions included within the Chancellor's 20 billion Christmas Pre-Budget Report giveaway – is obvious: to boost consumer spending on the high street just in time for the festive period.

However, these measures may be too little, too late to ward off the looming spectres of administrations and forced sales for even the most well-known high street giants.

When customers are already being enticed through their doors with 20 or 30 per cent price slashes, will a 2.5 per cent Vat rate drop really make the difference?

The "spend now, save later" theme behind this Pre-Budget Report means that there will be less New Year celebrations for those high-earners (including Scotland's internationally mobile entrepreneurs) who have a 45 per cent super-rate of income tax and cuts in personal allowances to look forward to in 2011.

Indeed, for all of us, the April 2011 hangover is likely to require more than a hair of the dog to get through.

Not only will Vat rates return to 17.5 per cent as of January 2010, but also national insurance contribution rates will rise for all employees and employers by 0.5 per cent, making a serious dent in pay packages at a time when unemployment may be rising.

Tax cuts now can only be temporary measures as, looking to 2011 and beyond, some combination of further tax rises and/or tighter public spending control will, surely, be needed to put the public finances back on a long-term sustainable footing.

General economic wisdom is that, when we are teetering on the brink of a significant downturn, a fiscal stimulus is required rather than the squeezing that is implied by increasing taxes.

The gamble of lowering Vat rates now (paid for by increases in fuel duties) to jump start the economy, may stoke up more problems for the future and carries the risk of the Bank of England's monetary policy committee feeling less able to continue to cut interest rates rapidly in the short term.

Scotland's economy may well suffer more than south of the Border in coming months with its historic reliance on the badly-affected financial services, tourism and housing/construction sectors.

What Scotland really needed was measures to boost its entrepreneurial spirit and instil confidence into the family-owned and owner-managed business sectors, large and small, which have been the life-blood of the economy and which could offer Scotland the best route out of this downturn.

These are the businesses that are suffering most from the decline in demand and meteoric rises in financing costs – more so than their larger neighbours, which at least should have more financing options available to them.

As such, the deferment of the 1 per cent increase in the small companies' rate of corporation tax until 2010, the possible corporation tax repayments available as a result of the relaxation in loss-relief rules and provisions to spread the payment of tax bills will all bring welcome Christmas cheer.

However, perhaps a reversal in the downward spiral of consumer demand would have made a better Christmas present.

The Chancellor succumbed to the temptation to stick with what he knows best and pump money into the public sector, whereas perhaps what Scotland really needs are private- sector boosters.

From shortbread to oil and gas, long-term fiscal stimuli (whether by means of tax credits or cuts) that can allow businesses the certainty to look beyond the current economic woes, batten down the hatches and forecast out of the downturn, will be the key to allowing Scottish businesses to come out on top when the economy turns a corner.

So what was missing from Alistair Darling's Christmas stocking?

The multinational companies investing in Scotland's oil and gas sector – which provide one of the only lights in the tunnel for Scotland's economy at the moment – will breathe a collective sigh of relief that the Chancellor turned a deaf ear to the now regular calls for windfall taxes.

However, there remains the threat of so-called social tariffs for energy companies if they do not pass on quickly enough the fall in wholesale energy prices to help householders living in fuel poverty.

Green taxes also did not get much of a look-in, apart from some tinkering around the edges with reforms to air passenger duty.

This could have been an easy target as the general reaction from business has been that it is quite happy to mend its ways in this area in return for green tax incentives.

However, what is really needed is a clear statement of long-term strategy rather than the ongoing tweaks to the system that result in claims that green taxes are to raise money rather than change behaviour.

This Pre-Budget Report could hardly have come at a more crucial time for the UK economy.

Some commentators have called it a "seminal moment in British politics" as we hover on the brink of recession with daily reports of job cuts and economic doom and gloom.

The talk has turned from speculation as to whether we will enter recession to whether we are moving from recession to depression – and yet still more international banking giants succumb to their fates week after week.

It remains to be seen whether the Pre-Budget Report has provided a large enough dose of Christmas spirit to warm the economy back into life or whether, come the January hangover, high street names may turn out to have suffered a not so merry Christmas.

&#149 Rhona Irving leads PricewaterhouseCoopers Scottish tax practice.

THE PRE-BUDGET REPORT: FULL COVERAGE