Alistair Darling has cut VAT and other taxes to try and boost the economy. Government debt will rise to a shockingly high level. But tax cuts are the right move nonetheless.
As widely predicted, Alistair Darling has cut taxes today and increased spending.
The most significant cut is on VAT, which will fall from 17.5% to 15% on 1st December. This is a temporary cut that will only last until 31st December 2009. However, duties on fuel and tobacco will be increased to make up for the reduced VAT on those products. The VAT cut should boost the economy by £12.5bn.
More giveaways
- The Chancellor extended this year's temporary rise in income tax allowance which was originally introduced to soothe the fuss over the 10p tax rate.
- Increases in child benefit will be brought forward three months to January 2009.
- Pensioners will get an extra £60 payment in January.
- The government will offer an extra £1bn in loans to small businesses that are unable to get finance from banks, via a `Small Business Finance Scheme'.
Rises to come
However, Darling does plan to increase taxes in a few years' time. In April 2011 a new income tax top rate of 45% will be introduced for people earning over £150,000 a year.
National Insurance contributions for both employers and employees will rise by 0.5% at the same time.
Poor numbers
It's not surprising that taxes will have to be increased in 2011 as some of the debt numbers in today's report are shocking. For example, government borrowing is expected to rise to £118 billion in 2009 - 8% of GDP.
So I can understand why many people will be horrified by the government's decision to borrow more money. It doesn't seem rational to borrow more money when government debt is already too high.
And here at The Fool, we wouldn't normally advise an individual to solve a debt problem by taking out fresh loans.
But when it comes to governments, it sometimes makes sense to borrow more. And we're in one of those moments now. As I argued in my blog last night, our economy is in a mess and we desperately need a boost to demand to avoid an economic slump. If we have a slump, the government's balance sheet will only deteriorate further.
So I welcome today's announcement.
We'll cover the report in more detail later in the week. In the meantime you can find out more information about how the Pre Budget Report will affect you on the Directgov website.