The great election giveaway

Published on Saturday 22 November 2008 18:37

THE oversized shopping bags tell you it's nearly Christmas. On a chilly Friday afternoon, dozens of shoppers, struggling up and down Glasgow's Buchanan Street, are manhandling their gifts home. The annual assault on the high street appears normal on the surface. But underneath, the brute reality of the credit crunch is lurking.

Mary Liddell, a 64-year-old shopper from Campbeltown, is lugging a huge John Lewis bag out of Buchanan Galleries. "Christmas will be as normal," she insists – only to then explain exactly how different it will actually be. "We are just about to retire and we have a pension fund which has gone down quite a bit," she reflects. Plus the family haulage business she helps to run has now ground to a near standstill. Nothing much the Government can do can solve things, she adds. "Tax cuts are always good. But I don't know whether that'll solve the situation."

Chris Burnside, a 43-year-old goods manager from Glasgow, is equally resigned. "We'll have a good Christmas and then I'm going to have to rethink things quite a lot," he says. "Things don't look good at all." The imminent approach of the Yuletide season may be keeping people's spirits up: but the shoppers in the street appear to know that afterwards tough times lie ahead.

Quite how sick Britain is going to get next year is up for debate. But tomorrow, we will at least know the nature of the cure. Alistair Darling will get to his feet in the Commons to offer the annual Pre-Budget Report. The bland title is misleading, for the Chancellor's appearance at the dispatch box may make the difference between a deep depression and a mild recession in the forthcoming year. It may also dictate the course of British history for a decade. "This is going to be an absolutely seminal moment in British politics," said one member of the Government yesterday.

Last week, the scale of the challenge facing the Government was made clear as a blizzard of anecdotal evidence confirmed the depth of the recession to come. Between June and October, the number of homes repossessed by mortgage lenders rose by 12% to 11,300. A further 168,000 borrowers were revealed to be in arrears. Job cuts were announced everywhere: 300 in Inverness at a fish processing plant; 300 in East Anglia at a bus firm; 2,000 across the UK in a building firm; 52,000 within banking giant Citigroup. The week closed with the exiting bosses of RBS apologising for the mess they had left, not long before their shareholders voted to send the once-proud bank into public ownership. So what will Darling's remedy be? And does it have the slightest chance of working?

Taxes are going to be cut tomorrow. The only questions are which ones, and how much. Darling is said to have spent much of last week reining in excitable calls for a package of measures costing up to 30bn, following warnings that such a huge sum – all funded by extra Government borrowing – would be "reckless". But, leaving all that aside, in the short-term, there are still going to be some serious winners.

Shoppers this Christmas may be first in line. Scotland on Sunday understands that a plan to cut VAT from 17.5p to 15p is the most favoured option for the sharp shock to the economy which Darling is looking to produce tomorrow. A cut also allows Darling to claim he is taking immediate action as it could be arranged without any delay. Parents who are planning to buy imported computer or electronic products for their children this Christmas will immediately feel the benefit.

The move also meets Darling's desire to target any 'fiscal stimulus' measures at those on lower incomes. VAT is seen as a regressive tax, because it costs the same for everyone no matter what their income. A cut in VAT would therefore be a bigger help to taxpayers on low incomes. The downside is that extra spending on imports means that those funds will leak out of the UK. Former Conservative Chancellor Ken Clarke yesterday said: "If it's possible to afford a fiscal stimulus I would go for VAT because the only case for a fiscal stimulus is to stimulate spending and consumer demand so the tax on spending is the one to go for. But it should be temporary."

The move is also backed by the Scottish Government which has called for a cut in VAT on home renovations, claiming it would help to boost the country's flagging construction sector.

In a further bid to boost low income families, Darling is under pressure to further increase the tax threshold. The Chancellor agreed a temporary increase of 600 earlier this year, meaning that the first 6,000 of income was not taxed. The move was forced on Darling following the debacle of the scrapping of the 10p tax rate. Now Labour MPs want more, insisting that more lower paid workers should get a boost.

Poverty campaigners say the move would have a double positive. John Dickie, the head of the Child Poverty Action Group in Scotland, said: "Families in poverty have no choice but to spend any extra money on essentials immediately. Such an investment would be a highly cost effective way of injecting money into the economy as well as getting Government back on track toward meeting its promise to half child poverty."

Labour MPs were already counting their chickens last week, claiming poorer constituents after tomorrow will be as much as 2,000 a year better off.

The wish-list in front of the Chancellor is as long as his arm. Fuel duty is likely to remain frozen. The temporary stamp duty holiday for lower-priced homes is likely to be extended. Plans to offer more to the poor in the form of tax credits were being talked down yesterday as too complex to administer. Darling wants to use quick and simple measures, clearly explained, so people know what is coming their way.

Tomorrow will be his day in the sun. But for fiscal conservatives, all this is crazy. The idea of force-feeding yet more borrowed billions into Britain's sickened economy will end in tears, they warn. Andrew Haldenby, director of the think-tank Reform, said: "A fiscal stimulus would be like giving an alcoholic a bottle of whisky." Consequently, they warn, Britain's hangover – which is already going to be bad – is now set to be far worse. Tax rises of 100bn come 2010 are being mooted by some. It will be the task of Shadow Chancellor George Osborne tomorrow to try to convince the public that the short-term gain is not worth it.

The problem for Osborne is that the Conservatives' position looks isolated. Prominent business groups, including the CBI, have swung behind the logic of a fiscal stimulus, arguing that desperate times require a short-term, temporary boost. And the decision by David Cameron to oppose tomorrow's tax cuts as a "tax con" has delighted Labour. Lord Mandelson was just one senior minister who, last week, could be heard discussing how the Conservatives appeared lost over the crisis. Another Cabinet minister added: "The Tories don't know what to do because the intellectual case they rely on – reducing Government intervention – has now been turned upside-down."

Another minister said: "None of us can believe our luck. They didn't need to oppose this and yet for some reason they have. It just shows up to everyone that they haven't got a clue."

The result of all that euphoria within Labour circles means that Westminster's corridors are again buzzing with election speculation. Brown has until May 2010 to hold the next election. Last week, he moved quickly to quash claims of a vote next year. But that denial, say MPs, simply reflects the paranoid determination within his inner-circle to nip election speculation in the bud, following the debacle over the 'election-that-never-was'. Speculation of an election in April or June next year cannot, therefore, be discounted.

A growing number of Labour MPs are in favour of going to the country as soon as practicable. Many discussed the plans while campaigning together during the Glenrothes by-election. Brown is at the peak of his powers, they say – his shattered credibility apparently once more restored. The time to go, therefore, is now. One MP who is sceptical of Brown's allure said: "There's only a certain amount of time when he can still be master of the universe before people start thinking of him as the grumpy old uncle again."

If taxes do have to rise in 2010, MPs note, Darling would have to signal those increases next year ahead of a general election. And who wants to fight a general election promising tax increases?

Darling and Brown are staking everything that one final last plunge into the spending pot is what is required to kick-start the economy. Cameron and Osborne are betting the house that it won't. One Government figure said yesterday: "Tomorrow will dictate a lot for the future. We now have a clear choice between Labour and the Conservatives. We've made our choices on this and now we're going to find out who is right. It's game on."

Tax cuts

THE tax cuts announced tomorrow are almost certain to focus on those with low and middle incomes.

The reason for this is simple. If the Government were to direct tax cuts at people on higher incomes, it would not have a very big effect on the high street.

Well-off households may cut back a little during the tough times, either by eating into their savings or increasing their borrowing, but their spending does not change that much. They have the resources to ride the out the financial gloom.

Directing tax cuts at them, therefore, is not likely to trigger a spending splurge.

Low and middle-income households, however, consume far less during a downturn because they literally run out of cash and credit. Increasing the amount of money in their wallets is more likely to see that cash being pumped through the economy, as they start to spend once more.

One recent American study found that policies benefiting the long-term unemployed were the most efficient way of giving a one-off boost to the economy.

This may raise quibbles among those already irked at the sight of poor families buying flat-screen TVs, above, but Alistair Darling is hoping this measure will have a "multiplier effect".

Higher household spending means more goods have to be produced, which means more firms have to hire more workers, meaning there are more people earning and spending, and so on.

Darling is also hoping that some of the money he borrows to pay for all these financial incentives will come back to him in the form of VAT on the extra purchases.