Whilst Gordon Brown is busy generating embarrassing moments in the US trying to follow Tony Blair onto the global stage, at home Labour MP's incensed at the abolishment of the 10% Tax band and the impact it is having on die hard low paid Labour voters are now in open revolt.

Since New Labour were elected in 1997 one of their primary goals has been towards the redistribution of wealth towards the low paid, those unable to work and pensioners. They have by and large achieved this goal through implementation of multiple policies such as the Tax Credits system, boosting of state pensions and expansion of the range and number of benefits available. These actions more than any other have gone towards ensuring two successive labour victories following the first landslide win in 1997.

The smoke and mirrors publicity stunt of a cut in the basic rate from 22% to 20% has started to go horribly wrong as the government attempted to keep silent on the abolishment of the 10% tax rate so as to attempt to grab the headlines of tax cuts ahead of an general election which is now not expected to happen until 2010.

Gordon Brown has shown himself to be an excellent number 2 to Tony Blair's numero uno, but he is clearly unable to shift from thinking like a Finance Minister to thinking like a Prime Minister. The abolishment of the 10% rate band is a huge own goal and likely to hit New Labour hard in the May local elections as Labour voters protest at the apparent change in direction of New Labour in favour of the more well off.

The abolishment of the 10% tax band hits all those on low earnings without children which number in the several millions. Even the Treasury estimates that the tax change leaves 1 in 5 households worse off, hitting households on earnings of less that £18,500. In addition, most people paying into their pension pots lose 2% state contribution, therefore on face value this would make people less likely to save into stakeholder pension schemes.

What Gordon Brown should have done was to abolish the 10% tax rate by raising the threshold at which people pay taxes to £7,500. However that would have cost at least £6 billion so would have required a tax rise elsewhere.

At the same time the deepening credit crisis and prospects for a UK recession during 2009 is shattering Gordon Browns image of economic competence and opens the door for the opposition to build a case for the electorate to take over at the next election.

Unless Gordon Browns gets a grip on the Labour party and its policies then this may be seen as his "Poll Tax" moment, within a year he may be facing a leadership challenge as the party takes defensive action to avoid an election defeat in 2010. Therefore the logical thing to do would be a U-turn by reinstating the 10% Tax Band and putting the basic rate back up to 22%, this would be politically damaging but not as damaging as leaving the impact of abolishing the 10% tax band to fester. MP Angela Smith who threatened to resign from the Government has issued statements that alludes to a possible U-turn after changing her mind on Friday.

By Nadeem Walayat

Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 120 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

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