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Panicked income tax adjustment amid economic gloom

by Hugh Bicheno on 14 May 2008, 07:57

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Absurd contortion to avoid U-turn on tax rates

In an emergency statement to parliament on Tuesday, Chancellor of the Exchequer Alistair Darling raised the income tax free allowance for fiscal 2008 by £600 to £6,035. Basic rate taxpayers will get back £60 in September and £10 a month thereafter.

The measure is intended to pacify a rebellion within the ruling Labour party against the abolition of the 10 percent band of income tax for the lowest paid, to cover a reduction in the basic rate from 22 to 20 percent. It is unlikely to do so – they smell blood.

Darling offered no explanation why a measure that disproportionately affected 5.3 million low earners could not simply be reversed. What he announced instead will benefit 22 million people at a cost to the exchequer of £2.7 billion, which will be covered by borrowing.

Further bad news came from the Office for National Statistics, which reported that the Consumer Price Index (CPI) rose at a 3 percent annual rate in April, up from 2.5 percent in March and the sharpest monthly rise since the current set of CPI indicators was adopted in 1997.

Producer prices rose at an annual rate of 7.5 percent in April, the fastest since current records began in 1986 and far above market expectations, the ONS reported. Input prices also saw a record jump, rising at an annual pace of 23.3 percent. Sterling sank to a three-month low against the dollar.

Adding to the gloom, the April housing market survey by the Royal Institution of Chartered Surveyors found confidence at its lowest level since the survey began in January 1978.

Data from the British Retail Consortium showed same-store sales slipped 1.5% during April, confirming a three-month downward trend.

The Bank of England cannot cut the basic lending rate without fuelling inflation, which can only be wrung out of the economy by further recessionary pressure. It’s called stagflation, and the man responsible for it is not the hapless Darling, but his profligate predecessor Gordon Brown.

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