Teresa Hunter: Labour must dig deep or face fate of Gabriel Grub

Published on Saturday 14 November 2009 12:09

IT'S that time of year, as Christmas beckons, that I find myself thinking of Gabriel Grub, Dickens' lonely gravedigger in The Pickwick Papers.

Our modern equivalent is Chancellor Alistair Darling, who will interrupt our Christmas shopping and pre-festive parties with his pre-Budget speech. Get it wrong and he could bury the economy and Labour's chances at next year's election.

Grub was a miserable man who spent Christmas Eve digging graves, alone. He was a man it was "difficult to meet without feeling something the worse".

As we may all feel, after Darling delivers his pre-Budget speech on 9 December, which is expected to increase taxes.

I'm not convinced. I struggle to think of any government which increased taxes in the run-up to an election, other than Tory Chancellor Anthony Barber who introduced value added tax (VAT) in 1973. Labour came to power a year later.

The government will also find it hard to ignore those economists who warn of the dangers of increasing taxes and cutting spending before the recovery is entrenched.

In his new book, The Trouble With Markets, Roger Bootle implies we should relax a bit more about the levels of government borrowing, when we remember from whom we are borrowing. It is ourselves, or rather our pension and other investment funds which buy government bonds. Net overseas holdings of debt is small. So we are paying the interest to ourselves.

Rather, he worries the biggest danger is exaggerated concerns about debt that precipitate action to curb it.

He writes: "Bearing in mind the public debt is owed to ourselves, I believe that the greatest threats to economic wellbeing arising from the size of the debts are posed, not by the debt itself, but rather by how we might react to it: that is by excessive early tax rises, which could have the effect of prolonging the depression."

Gloomy stuff. "Show the man of misery and gloom a few pictures," the goblin king ordered after the ugly fairies stole Grub away to their underground cavern. There he witnessed a life-changing procession of ghostly pageants. Such nightmare scenarios must now be flashing before Darling at 11 Downing Street. Which will he choose?

My guess is he will deliver a typical Labour Budget which, long on detail, will look substantial, but when it unravels will not amount to very much we did not already know. New measures will be announced for years to come.

Personal allowances, for example, are required to rise in line with the Retail Prices Index by law. However, with RPI in negative territory, he could announce a freeze, which is a tax increase, but one we have already wished upon ourselves.

National insurance is rising by 0.5 per cent from April 2011. He could re-announce this as a tax increase; or he could boost the hike to 1 per cent. He could also confirm a previous pledge to align tax and national insurance thresholds, which would also bring in a few more pennies.

VAT is going up at the end of the year to 17.5 per cent. He could lift it to 20 per cent either at the same time or in phased steps thereafter. Or he could abolish exemptions on items such as children's clothing or food.

Pledges to reform capital gains tax are made for budgets when there is little room for manoeuvre. Most people are bemused by the current system which allows investment and property gains to be taxed at 18 per cent, when the highest rate of income tax is 50 per cent.

The Chancellor's dilemma is that, while a major overhaul realigning income and capital taxes makes a catchy budget soundbite, it won't bring in any money. Most investors are still nursing plenty of losses to offset against recent stock-market gains, and long-term property investors are sitting tight.

If there were such things as fairies at the bottom of the garden who can make your dreams come true, my wish would be for some increase in the 30,000 tax-free ceiling on redundancy lump sums.

This has not been upped for decades. Those being made redundant with big lump sums are usually of an age where it is unlikely they will ever work again. It's unfair that their last wage packet should be ravaged by an effective 60 per cent tax.

They used to be able to shelter it in their pensions, but this option has been closed. A government which penalises the unemployed during a slump deserves a good kicking. This is precisely what the miserable Grub suffered at the feet of the goblins, before he vanished for good.

Vouching for vouchers

WE WELCOME the move by leading Labour women to fight the proposal announced at its conference to end tax relief on childcare vouchers.

Prime Minister Gordon Brown is wrong to assert they help the better-off disproportionately. In fact, they pay for high-quality childcare provided by well-remunerated staff. These are the ones who would suffer if the vouchers were to be scrapped.