10p tax the Climbdown

So Alistair Darling has finally been forced into a humiliating backpedal over 10p tax. He has been forced into a wide-ranging compensation package that has literally blown a hole in the governments finances. In order to pay for this U-turn they are adding another £3bn pounds to borrowing for the current financial year. They are raising the personal allowance by £600 pounds for this year, although it is unclear what the base for indexation will be for next year so they could claw it all back in 2009/10 tax year. Simultaneously they have reduced the threshold for 40% tax by £600 pounds. So effectively the only people who will benefit are standard rate taxpayers. A few people will now be taken out of tax altogether but now an unknown extra group of people will find themselves in the higher rate of tax bracket. I doubt that they will be happy about this.

The whole farrago is instructive. Let us be clear raising the tax threshold is right in principle. However this is not a principled move by the government. The government have partly done the right thing but only under severe duress, for political reasons. If they could have got away without compensation they would have done. The biggest bugbear I have is how they have financed this, they have financed this by simply adding to the PSBR. We should be clear that government borrowing is simply deferred taxation or deferred spending cuts. At some point the money borrowed has to be paid back, so either spending gets reined in or taxes go up. There is no pain free way of repaying this money and £3bn is roughly an extra penny on basic rate income tax.

The problem the government will now find is that once the mood has turned even when the government gets things right Labour will not get the credit. The public will bank the good deed and carry on intending to vote the government out. This is because the public will be highly cynical of the motives, they will see all good deeds as electoral calculation and all bad deeds as malign. The government is now past the point where it can seek credit for its moves. I still expect the government to take a hammering in Crewe & Nantwich, and I expect that within a few days new disasters will overtake Labour. As John Major and a queue of Conservatives will testify, once the wind changes direction there is literally nothing you can do but brace yourself for the worst. Labour needs to start bracing.