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Budget U-turn

What is a Chancellor to do when he inherits something that should have been there in the first place? The 45% higher rate of income tax was one of Gordon Brown’s mistakes. It does not, on the whole, tax the rich, because income tax is a burden on employers. The higher rate just makes it more expensive to employ higher level managers and executives; they are reluctant to accept more responsibility and the stress that goes with it if they do not receive sufficient reward in return. However, getting rid of the higher rate got the government charged with being the party of the rich, which was not something to be drawn attention to when so much of its support, especially in the ‘Red Wall’ constituencies, is among those who are far from rich. It looks bad and has lost them support. The U-turn, however, has compounded the government’s political difficulties, as it indicates a lack of the willpower needed to maintain its credibility.

Clearly there is a lack of competence somewhere. The total tax reduction is trivial. The idea that the so-called Laffer effect will kick in is based on faith rather than evidence. If the Chancellor had simply raised thresholds and allowances, much the same result would have been achieved without attracting the bad publicity.

The bigger blunder is the helicopter money being handed out to pay for the higher energy bills. Windfall taxes on the energy companies might be part of the answer, though such ad hoc taxes are wrong in principle and set a bad precedent. Subsidising energy when it is in short supply is not smart. The cost of this measure could have paid for a halving of VAT, which would have put more money in people’s pockets while at the same time maintaining the incentive to be thrifty. However, scope for being thrifty in the use of energy is limited if you are a tenant in a badly insulated house. If you are  just scraping by on benefit or the state pension, you are confronted with choices which no-one should have to make, and a VAT cut is of little help.