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Commentary on the Pre-Budget Report

 
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John D Allen



Joined: 08 Nov 2008
Posts: 3
Location: London UK

PostPosted: Sat Dec 06, 2008 11:22 am    Post subject: Commentary on the Pre-Budget Report Reply with quote

Pre-Budget Report

It is a bold Chancellor of the Exchequer who can tell the House of Commons:

“Borrowing will rise to £78 billion this year (2009-10) and £118 billion next.

“But then, from 2010, as I take action to reduce borrowing when the economy begins to recover, borrowing will fall to £105 billion, £87 billion, £70 billion and £54 billion.

That series adds up to £500 billion in round terms and sounds as though Mr. Darling is ready to remain in office until 2015-16, by which time he
says we will return to borrowing only to invest. This was the Government’s initial promise when it first came into office, now set aside as the yield of taxation falls.

Such forecasts rarely prove to be correct. There is in them an assumption that the United Kingdom will be able to raise vast sums of this order over several years when government revenues and the value of sterling are in decline.

Borrowing on this scale once again raises the question of how it is that a country as financially strong as Britain cannot raise sufficient revenue to meet the demands of public expenditure. Could it be that these demands are too great for the economy to bear, especially at a time when unemployment is set to rise and many businesses are facing closure?

Where is all the money to come from? The fact that the Government is intending to borrow an additional £500 billion over the next five or six years suggests that somewhere there are untapped sources of revenue which to use the Chancellor’s words could be called into play to ensure that “we all share fairly the burden of the future”.

The broad outcome of the taxation measures based on the indications given by the Treasury in the recent Pre-Budget Report seems to be increases in taxation on the higher ranges of wages and salaries. But they are not likely to upset people at that level because it is customary for well run companies to look after their most valuable employees.

The situation of those earning less than £20,000 will be marginally improved. Nor in practical terms are people earning more than £100,000 a year - not an exceptional wage in the inflationary environment of the last few years – likely to suffer too much. The greatest threat to standards of living will be loss of employment; this will not discriminate between the high earners and those on more modest incomes.

Those earning over £140,000 will according to our confident Chancellor lose any personal allowance free of tax and at the same time be subject to a 45 per cent tax rate plus an increased national health contribution.

The additional tax of course pushes up employment costs most probably at the price of reduced margins as there is not in a declining economy likely to be much scope for increasing charges and prices. The Chancellor so he says wants to help everyone to weather the recession, but the increased tax burden on employment will be no help to enterprising usinesses that continue to secure contracts and win orders despite diverse circumstances.

Let us take the example of other increases in taxation which the chancellor failed to mention because they are not strictly within the scope of the Pre-Budget statement.

An obvious one is council tax which the Opposition has threatened to freeze if it gets an opportunity, though such a policy deprives the local authorities of funds to maintain services already under pressure enough. This policy is being advocated in Scotland where the local authorities are protesting that under present conditions a three year freeze on council tax cannot be maintained without risk to the welfare of local communities.

Central government in London on the other hand has no intention of being starved of funds. It promises to continue with heavy borrowing to fund public services and development of the infrastructure. The taxpayer is left to foot the bill in later years.

One onerous tax increase easily overlooked is the rise in business rates, currently causing great anxiety among Britain’s retailers, raising their expenses substantially in the tax year 2010-11, probably in the depths of recession.

At a time when means of ‘fiscal stimulation’ are being sought by the Government, the shopkeepers fear that the pending increase in business rates will come at a time when their margins are being dangerously squeezed in tough trading conditions, as indeed they are at present.

The retailers’ trade association says that next April’s business rates increase would normally be based on September’s five per cent rise in the retail price index. But since then the RPI has fallen sharply.

But a year after that increase comes the 16 per cent cumulative increase due to the 2010 revaluation of business premises. This tax like others inflates costs and prices contrary to the popular notion of ‘sharing the burden’.

Some high street firms may be able to absorb the rise due to advantages of location, but will still want to recoup the increases from their customers as far as they can. The majority on slender margins and with demanding leasehold commitments are deeply concerned at the prospect of business failures. Once again, an important arm of commerce and the distribution of wealth is being placed under pressure by inflationary taxation at a time when economic policies are being directed towards ‘financial stability’.

Borrowing on this scale is definitely not sound finance. In round terms the
2007-08 level of national debt was £600 billion with an interest charge of
around £30 billion a year. This year’s borrowing (2008-09} is estimated at
some £60 billion according to the Item Club, quoted recently by BBC News.

Carried forward therefore to the new Budget year could be as much as £660 billion debt. In the first year covered by the Pre-Budget report (2009-10), according to the Chancellor the U.K. Government is expecting to borrow close on £80 billion.

Assuming that the growing interest charges are contained in the resultant £740 billion debt at the end of that year, we then move on to 2010-11 when a further £105 billion borrowing is forecast, raising the overall burden to close on £850 billion.

That quantity of debt compares with the current gross national product of around £1,400 billion, now in decline. In the following year, the second of the four years of economic recovery, £87 billion will be required according to the Treasury statement to close the 2011-12 estimated gap in funding of public expenditure.

That could of course be reduced by cuts in spending which the present government is resolutely refusing to consider. At present the clear intention is to raise taxation. But would a diminished economy be able to bear the weight of more taxation on wages, profits and prices?

Another £120 billion in round terms is due to be borrowed according to the Pre-Budget Report in the final two years when the economy is forecast to be recovering. By the end of that period (2014-15), the national debt - £660 billion in the current year plus £500 billion more on the basis of the Government forecast - could be approaching the scale of GDP.

Is that really a practical proposition for sustainable and stable public finance?

Plainly the programme set out by the Chancellor cannot work without radical changes in economic policy, cutting wasteful expenditure and lightening the incidence of taxation on the dynamic elements of industry such as the workforce and its sources of supply.

Removal of VAT would make a good start but as things stand successive British governments have been bound by the policies and directives of the European Union and there is little scope for reform. It must surely be possible to produce something fairer and more Intelligent than the present system with its irrational incidence.

Where do we start on a fresh approach which could save Britain from the disastrous economic policies followed by every colour of government over the past 50 years, culminating in current proposals to burden the nation still further with debt?

The present policy of massive borrowing is said to be based on Keynsian
economics. But the author of The General Theory of Employment, Interest and Money published during the 1930s recession himself famously said in his concluding notes:

“Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. .... “Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
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Saeed Zahedi



Joined: 05 Oct 2007
Posts: 4
Location: London, Guildford, UK

PostPosted: Fri Jan 02, 2009 7:04 pm    Post subject: Reply with quote

"Listen... do you know about the two kinds of fools?"
"Plain and damn?"
"No..." Karkov grinned and began. "First there is the winter fool. The winter fool comes to the door of your house and he knocks loudly. You go to the door and you see him there and you have never seen him before. He is an impressive sight. He is a very big man and he has on high boots and a fur coat and a fur hat and he is all covered with snow. First he stamps his boots and snow falls from them. Then he takes off his fur hat and knocks it against the door. More snow falls from his fur hat. Then he stamps his boots again and advances into the room. Then you look at him and you see he is a fool. That is the winter fool.
"Now in the summer you see a fool going down the street and he is waving his arms and jerking his head from side to side and everybody from two hundred yards away can tell he is a fool. That is a summer fool." (Hemingway, For Whom the Bell Tolls)
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Leonie Humphreys



Joined: 23 Sep 2008
Posts: 216
Location: West Dorset, UK

PostPosted: Mon Jan 05, 2009 3:18 pm    Post subject: A fool and his money are easily parted... Reply with quote

Saeed,

I am rather confused by your Hemmingway quote about the fools! Is this a comment based on the old saying 'a fool and his money are easily parted'?! Quite so!

Leonie
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