Workers on just £20,000 to be worse off, says think-tank

Published on 25/11/2008 20:59

A HUGE row broke out yesterday over Alistair Darling's emergency Budget after it emerged people earning as little as £20,000 would lose out.

Independent experts at the Institute for Fiscal Studies (IFS) backed Conservative and Liberal Democrat claims that those earning far less than the UK's 24,908 average wage would pay more when changes to National Insurance (NI) come fully into effect in April 2011.

This contradicted assurances from the Chancellor, and calculations in the official Budget "red book", that only people earning above 40,000 would pay more.

The row came as the Tories forced a Commons debate on the proposals in Monday's Pre- Budget Report (PBR), which aim to inject 20 billion into the economy to reduce the worst effects of the recession.

There was also scepticism over Mr Darling's claim that the UK would start to move out of recession in the second half of next year. This was fuelled by revelations that his 2.5 percentage-point cut in VAT was likely to have a limited effect on spending – and would cut shop-floor prices by only 2.1 per cent.

The IFS said the twin changes to NI would mean workers earning 20,000 and above paying more by 2011. The changes begin next April, when NI is levied on a greater proportion of each worker's income. This will be followed in April 2011 with a half-point increase in the 11 per cent basic rate of NI.

By comparison, Treasury documents stated that "people with incomes below 40,000 will not pay more income tax and National Insurance contributions".

It said those earning between 40,000 and 100,000 would pay in excess of 150 a year more, those on 100,000 to 140,000 would pay an extra 1,144, while those earning above 140,000 would pay at least 3,172 more.

Mr Darling insisted yesterday that those on lower earnings would not lose out overall, once higher allowances for income tax had been taken into account. He said: "People earning less than 40,000 won't be paying more… You have got to take all the tax system into account, not just one part of it."

But Mike Brewer, of the IFS, said: "The National Insurance change means that, if you earn over 20,000 a year, you will be paying more National Insurance, and therefore worse off."

This was seized upon by George Osborne, the shadow chancellor. "This is independent confirmation of what we have been saying about the truth of Gordon Brown's bombshell budget," he said.

"Now it is clear that millions of people on modest incomes in middle Britain will be hit by Labour's permanent tax rises."

The row revolves around the date from which changes in tax and NI are measured. Mr Darling's calculations are based on the amount paid in April 2008 – before he raised the tax-free allowance to compensate those who lost out over the removal of the 10p income tax band.

But the IFS, and opposition parties, say it is fairer to measure the impact of higher NI and changes to tax allowances from the amount people currently pay – so allowing them to claim that the losers start at 20,000. At this rate, the net "losses" are modest – only about 3 a year – though they rise to 150 for those earning 40,000.

The IFS also poured cold water on Mr Darling's hope the 45 per cent tax rate for people earning 150,000 or more would raise 670 million a year. It said high earners would do all they could to dodge the rate, either paying more into their pensions or even making charitable donations. "The 45 per cent rate will raise approximately nothing," Mr Brewer said.

The IFS said the 2.5-point cut in VAT would not be replicated on the shop floor when it is introduced for 13 months from next Monday. This is because the change would be implemented by traders adding 15 per cent VAT to goods, rather than 17.5 per cent at present – and rather than taking 2.5 per cent off the current shop price. For example, an item costing 100 pre-tax retails for 117.50 – but 115 under the new rate. This results in a 2.50 saving to shoppers – 2.1 per cent less than the current price.

An analysis of Treasury figures reveals it expects "approximately half" of the 12.4 billion being spent on the VAT cut to translate into larger volumes of spending.

But the Treasury says that if companies fail to pass on the VAT cut and boost their profits instead, this could lead to them employing more staff.

Yvette Cooper, the Chief Secretary to the Treasury, appeared to suggest ministers would be relaxed about companies holding on to the VAT reductions. She said the cuts could mean "there is more money in people's pockets. Or if shops decide not to pass on the prices, they will make more profits so then the shops will then be better off".

To add to Mr Darling's woes, the Organisation for Economic Co-operation and Development yesterday unveiled bleaker predictions for the UK economy than he had suggested.

In a separate twist, the European Commission will today unveil its own fiscal stimulus package. It will propose a temporary, across-the-board VAT cut to boost consumption but will not impose it on all 27 EU states.

Darling considered raising VAT to 18.5%, leaked document reveals

ALISTAIR Darling considered raising VAT to 18.5 per cent in 2011, but rejected the idea, it emerged last night.

The proposal was included in a draft Treasury document written last week ahead of Monday's Pre-Budget Report (PBR) and accidentally published on an official website.

In the PBR, the Chancellor cut VAT by 2.5 per cent to 15 per cent as part of a 20 billion fiscal stimulus package designed to help restore economic growth.

He told MPs the tax would return to its previous level – 17.5 per cent – in January 2010 and acknowledged there would have to be other tax rises at a later date to pay for the borrowing he is undertaking now. But he said the bulk of the burden would be carried by wealthier individuals.

The draft Impact Assessment document, mistakenly published on the Office of Public Sector Information's website, indicates Mr Darling considered raising a purchase tax which would affect all British consumers.

A Treasury spokesman said: "This was an option that was considered and rejected."

Last night, the Tories claimed the plan was evidence of "Labour's secret tax bombshell". George Osborne, the shadow Chancellor, said:

"Gordon Brown told us that he would have no 'hidden manifesto' and 'everything is above board'.

"But these documents show that Labour was planning to deceive the British public, and will raise VAT on everyone after the election. Labour have a secret tax bombshell set to explode under the British people if they ever get re-elected."

PRE-BUDGET REPORT: MORE COVERAGE

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• NI hike top of business list of gripes over Darling's plans

• Peter Jones: Darling's emergency budget threatens a financial headache for supporters who voted for a party that would make them better off

• Bill Jamieson: Nail-biting times as Darling's in-tray fills daily with bad news