Wednesday, 26 November 2008

The sting is in the tail

To understand the pre-budget statement you really need to read it in full which I have not had the time to do that. However, a few stings in the tail are emerging, leaving aside the discarded proposal to increase VAT to 18.5 per cent after the 'tax holiday'. Anyone who has worked on government files in the National Archives knows that proposals are often discarded at the last minute, although Dave Cameron is using it to push his recycled 'Labour's tax bombshell' theme which always invites the question 'well what would you do?'

National Insurance is a form of income tax by another name (the marginal 40 per cent rate is already effectively 41 per cent) and is to go up again. Moreover, tinkering with tax allowances means that owes earning over £100,000 are set to pay a lot more tax in the future.

Even more significant, the tax threshhold for the 40 per cent rate will not be raised setting 'fiscal drag' in motion as inflation returns and clawing more taxpayers into that band, including many public sector workers such as teachers and police personnel. They will take a hit from another direction because, after many years of perhaps over rapid growth, the public sector will receive relatively little extra money in real terms. Indeed, given the demands of an ageing population, in some respects it could lead to cuts in services.

Alastair Darling has not been quite as transparent as he would like to claim. And when the full implications sink in the euphoria about 'soaking the rich' in the Labour Party may dissipate.

There is a real incentive question here. If highly skilled and qualified people think they are being over taxed and also receiving deteriorating public services, there are plenty of other places they can go - although it seems that they may be beaten to it as far as Australia is concerned as many citizens return home.

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