UK Tax U-turn Rebates to Buy Votes- Personal Allowances Up by £600

By: Nadeem_Walayat

Gordon Browns Darling today made clear of how he will perform the Tax U-turn alluded to in recent weeks. The U-turn will take the form of an across the board increase in the personal allowances of every tax payer by £600, thus those on the standard tax code of 543L will see their tax allowance rise from 5435 to 6035. This has the effect of handing very tax payer a tax cut of £120 at the basic rate of 20%. The estimated cost of this measure is put at some £2.7 billion which is substantially more than the £700 million of the original extra tax burden placed on the 5 million low paid workers that were hit by the abolition of the 10% tax band.

The chancellor Alistair Darling stated in Parliament:

Having looked at this further, I believe that a rebate scheme would be complex and expensive to administer. It would also take time to set up and changes to the eligibility for tax credits could not be introduced this year.

However, Mr Speaker, I can bring forward a proposal for this year that will offset the average loss and which will provide financial support more fairly, quickly and efficiently than any one-off rebate scheme - providing we legislate for it now in this year's Finance Bill.

For that reason I am proposing to bring forward one measure from the Pre-Budget Report now.

Mr Speaker, I want to help families on low and middle incomes as soon as possible.

But my proposal for this year will not only help those on low incomes who lost out, but also does more to help all basic rate taxpaying families at a time when oil and food prices have been rising in every part of the world.

So, at a cost of £2.7 billion, I will increase the individual personal tax allowance by £600 to £6035 for this financial year, benefiting all basic rate taxpayers under 65.

This will mean that 22 million people on low and middle incomes will gain an additional £120 this year.

4.2 million households will receive as much - or more than - they originally lost. The remaining 1.1 million households will see their loss at least halved.

In other words, 80 per cent of households are fully compensated with the remaining 20 per cent compensated by at least half. And in addition 600,000 people on low incomes will be taken out of tax altogether.

Mr Speaker, people aged between 60 and 64, whose average loss was £100 will also get the advantage of the increased personal allowance worth up to £120.

The increased personal allowance will apply to all income for this tax year and so will be backdated to 6 April.

As a result, from September basic rate taxpayers will see a one-off increase in their monthly income of £60 and then an increase of £10 per month for the rest of the financial year.

Mr Speaker, higher rate taxpayers were largely unaffected by the reforms announced last year.

So it is fair to focus this additional support on basic rate taxpayers only. However, as the £600 increased personal allowance applies not just to basic rate taxpayers but also to those paying tax at a higher rate, I am therefore reducing the threshold at which an individual starts to pay tax at the higher rate by £600.

The net effect of these changes is that the tax liability of everyone that currently pays tax at 40 per cent will be unaffected by the increase in the personal allowance. For those brought into the higher rate, they will gain by up to £120 this year.

This is clearly a panic move following the collapse in Labour's share of the vote in the May local elections and an attempt to buy the vote ahead of the by-election in Crewe and Nantwich to be held on 22nd May.

We can expect the fiscal and monetary responsibility guide books to now be found in the Number 10 and 11's rubbish bins as the strategy is now clearly to win the next election at ALL cost. The consequences for this are stagflationary i.e. government inflationary intervention will make the eventual pain far worse, which sets the scene for a sharp contraction in real GDP following the next general election as the inflationary forces let loose by a lax monetary policy are brought back under control.

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By Nadeem Walayat

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