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Chancellor Alistair Darling today announced that personal tax allowances would be increased by £600, to £6,035 for under 65s, adding a flourish to the u-turn centered on the abolition of the 10p tax rate.

The headline at BBC News Basic rate taxpayers to get £120 misses a point. When the 10p tax rate existed that would have been £60 tax savings. The £120 savings are based on the 20% tax rate no longer being applied. Those on low incomes are still getting mugged, just now they get to wear a nice little hat on their heads as they get coshed. A £600 hat to be precise.

I’d like to think someone read More 180s than the World Darts Championship, though if they had it would have been the full £1,160 increase in the personal allowance and not the £600 increase, which is delayed until September, and refunds. Still with the complicated.

One could be suspicious of the timing of the u-turn, that is apparently going to cost taxpayers £2.7bn, given the recent abysmal showing by Labour in the local elections and the impending by-election in Crewe and Nantwich. A point made by Conservative MP and shadow chancellor George Osborne,

“Let no-one be fooled why you are making this statement today - not because you wanted to…. but because this divided, dithering and disintegrating government are panicking in the face of the Crewe and Nantwich by-election”.

Moreover, the £2.7bn will be financed from borrowing. The rationale being that more debt and incurring huge interest bills, to be paid by the taxpayer now and in the future, doesn’t drain money from the economy while it is slowing. Though the whole idea of draining money from the low-waged while an economy is slowing didn’t appear to concern them when they announced they were abolishing the 10p tax rate.

What this “solution” doesn’t seem to include is all the extra hassle and expense for employers dealing with updating all their records. Apparently, costs incurred by those other than the Government aren’t even worth acknowledging.

Then there are all the new tax tables and updated employer packs which will have to be produced and sent out. How much taxpayer’s money is being wasted there?

As for the low-waged, initial reaction is that they are more confused than ever.

The £120 spoken of in the BBC headline will come in the form of an effective £60 rebate in September and then should equate to £10 a month from then on, assuming you earn enough that is. This should be good news for many on low incomes. However, some of the very lowest earners, including those who don’t have families or work enough hours to claim tax credits, will still end up with less money.

Middle income earners, of which there are about 17 million, should gain. The abolition of the 10p rate coincided with the reduction in the basic rate of tax from 22% to 20%. Therefore, most middle-earners did not lose out from the loss of the 10p band but, like everyone else, they will save the £120 tax that the increased personal allowance provides. This equates to £2bn of the £2.7bn cost, the Institute of Fiscal Studies says.

The upshot of all this is that employees and employers will be less confident about the future. Employers will waste time and money trying to put semi-right what Darling et al made wrong. Those on low incomes will find finances a little tighter, in the near-term at least.

As for confidence in the Government’s ability to deal with the more fundamental problems of an economy heading towards contraction whilst house prices are falling, it is likely that it has been irrevocably damaged.

It is said that Tiberius warned his regional commanders against overtaxing the citizenry by telling them, “boni pastoris est tondere pecus non deglubere”. It is of a good shepherd to shear his flock, not to flay them.

For a number of years tax rates have been creeping up. Both direct and indirect taxes being constantly cranked higher. During the good times hardly anyone cared that the Government kept confiscating ever greater swathes of people’s income. Credit was easy, house prices did nothing but go up, the economy, thanks to financial services and an obscenely bloated civil service, appeared to be tootling along fine. But when the outlook is uncertain the public loses its tolerance for being repeatedly mugged.

Stamp duty on house purchases up to 4%. Increase in the small business corporation tax rate, totalling more than 15% staggered over three years. The non-dom tax. National Insurance rates that creep forever upwards. An 80% increase on the lowest rate of Capital Gains Tax. And most recently, the ongoing incompetence that is the abolition of the 10% tax rate.

As with everything political, persecution by tax is initially on those who are seen as more fortunate. Picking on a minority group is fine, just as long as it is on status and not race. They are buying a bigger house than you, we’ll charge them four times the rate of stamp duty you pay. They are saving for their retirement, let’s rape their pension funds of £5bn+ a year. They have a bigger car than you, we’ll tax them more. Just wrap the penal tax rate in “pay their fair share” propaganda and you should be able to get away with it.

Analysis shows that, net of tax credits, the top 0.1% pay more income tax than the bottom 15% combined. They do not earn 150 times the income. If that top 0.1%, which is only 47,000 people, decided to leave there would be a big hole in the finances. The problem is there are big holes already.

The deteriorating economy, combined with profligate social spending and the escalating cost of maintaining bribes to keep key voter demographics on side, mean ever larger amounts of tax have to be drained from the populace. Result, larger groups have to be targeted. Hence the 10% tax band debacle.

The end result, many of the overtaxed are getting out. It is not only the so-called rich who are looking for the exit. Adding to the exodus is a middle-class squeezed on all sides. A tax system that persecutes single people for being single doesn’t help either. Now government proposals to tax companies on foreign profits have added many businesses to the growing list of those thinking of upping sticks.

The future does not look good. The secular trend is one of rising taxes across the board. Those being driven abroad by the Government’s ever more oppressive tax regime are net contributors to the country’s tax take. That means those who remain will find themselves having to pay a growing share of a rising tax bill.

Never mind being flayed, tax paying Britons prepare to be kebabbed.

Base rates were left at 5% as the two-day meeting of the Bank of England’s Monetary Policy Committee (MPC) culminated with a decision to do absolutely nothing.

The outcome was widely expected given the MPC’s wait-and-see mindset would never tolerate back-to-back monthly rate cuts. April’s quarter percentage point cut from 5.25% to 5% was more or less the death knell for a May cut, despite MPC member Danny Blanchflower calling last month for a half percentage point cut.

Next week’s publication of the Inflation Report was where a lot of economists laid the blame for the BoE’s “disciples of dither” failing to act and cut the rate.

Hopes are now that there will be a cut in June. However, the window of opportunity to sneak in rate cuts is closing. Price inflation is expected to pick up later in the year and there are genuine concerns that second-round effects from wage inflation will also become more prominent as we approach 2009. Those are rate-rising factors.

One opinion is that you want to get rates as low as is practical now so that any rate raising that needs to be done brings you back to where you started. As opposed to leaving rates on hold for now and still having to raise them later. Of course, that assumes the Central Bank has not totally discarded its inflation-fighting persona by then.

There are also concerns being aired that quarter-on-quarter GDP growth could hit 0% or even turn negative by year end. Whilst rate cuts take time to permeate into the economy at large, you want to get them out of the way well before the economy actually looks like it is going to contract. Cutting them when real GDP is stagnant, let alone shrinking, would be a little late to avoid the damage done and jobs lost in the interim.

To be fair, cutting rates will have little impact on the underlying problems in the credit and mortgage sectors. Though, given the lack of success of whatever else has been tried thus far, a little is better than none at all.

In the current environment any reduction in the Base Rate, hopefully matched by a reduction in the rates charged between banks, will be of most benefit to those with impeccable credit.

After years where ludicrously low rates were available to anyone, no matter what their credit standing, the easy-lending era has been replaced by something much more paranoid. Under the new regime it is those who have kept their credit files immaculate who will find they have the most to gain from any cuts in rates. For those who managed their credit and avoided the worst excesses of the debtfest of the last few years, their virtuous behaviour will be rewarded. On the other hand, for those who over-indulged, and have the stains on their credit file to show for it, good deals at good rates will continue to remain elusive.

Debt Advice Bureau was unsurprised by the MPC’s decision today to keep rates at 5%.

Stephen Rose, Debt Advice Bureau director, commented:

“We appreciate the problems faced by the MPC as it attempts to deal with the opposing forces of rising price inflation and a slowing economy, as evidenced by the split views of MPC members last month. However, we believe the window of opportunity in which the MPC can cut rates is closing fast. We expect RPI inflation to continue to rise, peaking in the 5.5% to 6.0% range before the year end. If the MPC wants to maintain the facade of inflation targeting, any chance of further rate cuts in 2008 will soon be lost.

“Whilst reductions in the base rate will not, in themselves, increase the availability of new credit for borrowers, nor necessarily be reflected in LIBOR, they would provide some relief to those mortgagors whose mortgage rates track the Base Rate. This becomes even more important when you allow for our expectation that house prices will continue to decline for some considerable time yet.

“The drag of declining house prices on the economy is likely to exacerbate any tightening in consumer spending caused by the restrictions in the supply of credit, currently felt hardest by those with less than impeccable credit histories. Therefore, if there is a genuine desire to try to avoid a full-on collapse of the housing market, it may prove preferable to attempt to keep mortgage repayments affordable as opposed to endeavouring to manipulate house prices through taxpayer funded schemes.

“Historically, corrections in house prices have co-incided with, and often precipitated, economic recessions. Whilst many mortgagors may be able to cope with a slowing economy and even the threat of negative equity, rising mortgage repayments may be one straw too many”.

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Notes to Editors:
1, Debt Advice Bureau is a not-for-profit debt advisory service which has been provided free and impartial debt advice since 2001. It is a remote service providing advice primarily by internet, as well as by phone and post.

Contact details:
Name: Stephen Rose
Phone: 08700 11 11 13
Email: press[at]debtadvicebureau[dot]com