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Labour Conservative Election N.I. Tax Smoke and Mirrors Debate Facts

ElectionOracle / UK General Election Apr 08, 2010 - 10:01 AM GMT

By: Nadeem_Walayat

ElectionOracle

Best Financial Markets Analysis ArticleOn face value It appears that Labour have gone wrong right at the very beginning of the general election campaign by attempting to fight against an avalanche of heads of British Industry who are coming out and stating that the rise in NI is wrong as it is a tax on jobs.


Today Stewart Rose the head of M&S came out with his own criticism of the 1% rise in N.I. Whilst Labour can make the argument that the heads of british industry would personally benefit hugely from the NI rise not coming through for instance Stewart Rose has personally over £100k annually riding on the NI rise not happening, so a great deal of self interest to stop it, and also that the 1% NI rise for all workers has very little impact on ordinary workers. i.e. someone on average earnings of £28k will see their NI bill rise by £80 per year.

However the fact of the matter is that the NI rise IS A TAX ON JOBS. Because it also includes an employers contribution tax hike of 1% that hits ALL companies that have to find the extra funds to pay for all workers whether or not they make a profit! If Labour wants to tax companies to help bring the deficit under control then Labour needs to tax Company PROFITS, and not companies on the basis of the number of workers they have which is what the NI 1% employer hike does.

National Insurance Tax Rise Facts

There is much confusion in the mainstream press as to exactly what changes in NI have been proposed, therefore this should clarify the matter:

  • The Labour party will raise NI from 11% to 12% on all earnings over £7,000 (up from 11% on all earnings from £5,700) upto a limit of £44,000, and raise the upper rate for all earnings above £44k from 1% to 2%. Employer contributions to rise from 12.8% to 13.8%.
  • The Conservative party will raise NI from 11% to 12% on all earnings over £8,000 (up from 11% on all earnings from £5,700) upto a limit of £44,000. The Conservatives will not raise the higher rate from 1% to 2%, nor the 12.8% rate on employers.

So the facts are BOTH parties will raise NI from 11% to 12%. The difference in raising the starting rates means under Labour those earning over £20,000 start paying more NI tax, and for Conservatives it means those earning over £35,000 start paying more tax, that and not hitting the rich (earning over £44k) and employers contributions. The net difference to the exchequer between both parties is £6 billion per annum.

The fact is that the N.I. £6 billion is a drop in Britains ANNUAL debt ocean of £167 billion. There is a hell of a lot of pain to come FOLLOWING the next election, tax rises, spending cuts by EITHER Conservative or Labour Government. Therefore if it is not a real rise in N.I. then it will be a rise elsewhere, historically the conservatives tend to raise VAT, so if as expected the Conservatives win the next General Election and regardless of whatever they say, they will raise VAT to 20% to raise an estimated additional £25 billion of tax revenue per year.

Efficiency Savings or Cuts ?

Labour has already announced £15 billion of efficiency savings instead of cuts. The Conservatives have announced a FURTHER £12 billion of efficiency savings on top of Labours £15 billion. In actual fact there will probably be little if any actual efficiency savings, therefore the word cuts should be exchanged for savings. In plain english Labour proposes to CUT Public Spending by £15 billion and the Conservatives by £27 billion per year. In total Labour cuts of £34 billion over the next 4 years are set against Conservative cuts of £82 billion minus £18 billion NI tax withdrawal for a net of £64 billion.

Whilst Labours cuts of £34 billion might sound like a large amount, however set this against the ADDITIONAL borrowing of £478 billion over the next 4 years. It is just NOT enough. Even the conservatives £64 billion will likely make only a small dent in the exploding debt mountain, what this suggests is that the market WILL force the next government to CUT the deficit and therefore spending by far more than any party is going to even hint at during the election campaign, we are talking along the lines of a £200 billion cut in public spending over the next 4 years, that's 6X Labours electioneering figure and 3X the Conservatives.

Where the NI debate is concerned, on balance the Conservatives have probably a better policy in that the NI hike will result in less people being employed due to the rise in employer contributions and therefore marginally less economic growth and it is ONLY economic growth that can save Britain from the debt crisis, spending cuts are necessary but they will not solve Britians debt crisis, all spending cuts will do is to DELAY BANKRUPTCY.

Also it sends the wrong message to companies, as it will prompt more UK companies to seek to offshore existing and new jobs to China and India.

So it IS a tax on Jobs, the sensible thing for Labour to do would be to abandon PARR of the tax rise on employers, just as they appear to have done with the cider 10% tax hike that was due to come in on the 6th of April but now has been delayed until 1st June.

Again both parties are lying to the electorate as to the degree of cuts necessary, not £6 billion per annum not £12 billion or even £21 billion, but something in the region of £50 billion per annum is necessary to prevent Britain from going bankrupt as my next in depth analysis will elaborate upon (subscribe to my always free newsletter).

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Source: http://www.marketoracle.co.uk/Article18487.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-10 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Alex Hartley
08 Apr 10, 21:14
GBP/USD

Hi Nadeem,

Do you still feel bearish towards sterling in the short term. I am aware it's still within your target zone of 1.40 - 1.55 but do you think it is still likely to head towards the low 1.40s?

It would appear that this 'criminal' scorched earth policy that Gordon Brown is pursuing is now having a positive effect on economic figures as we approach the election.

Thanks in advance for your comments.

Alex


Omar
13 Apr 10, 15:43
GBP/USD

Hi Nadeem,

Like Alex, I too am interested in your thoughts on GBP/USD given its recent rally. Do you still see this in the low 140s?

Omar


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