Experts question tax rescue package
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Economic experts are questioning the impact of Chancellor Alistair Darling's surprise announcement of £2.7 billion to compensate people who lost out from the abolition of the 10p income tax rate.
Some commentators suggested that the extra borrowing to fund increases in personal tax allowances could force the Chancellor to breach his own fiscal rule that national debt should stay below 40% of GDP.
And others calculated that the bulk of the money promised by Mr Darling would not go to the low-paid workers worst-hit by the loss of the 10p rate, but to middle-income earners.
Raising the threshold for the 20p basic rate of income tax by £600 will provide a £120 boost this year for all 22 million taxpayers earning up to £40,835 - including 17 million people untouched by the abolition of the 10p rate.
But the payout will not be enough fully to compensate some 1.1 million of the lowest-paid workers, earning around £6,500 to £13,000, whose losses were estimated at up to £230.
There was also uncertainty over whether the adjustments to tax allowances announced on Tuesday will be carried over into future years - something Mr Darling said would be clarified in the Pre-Budget Report in November.
Mr Darling's announcement was warmly welcomed by Labour backbenchers, unions and representatives of the elderly.
TUC general secretary Brendan Barber said the Chancellor had "sent a powerful signal that fairness is back on the agenda".
But Liberal Democrat Treasury spokesman Vince Cable said that almost £2 billion of the money handed out by Mr Darling would go to basic-rate taxpayers who were not left out of pocket by the earlier tax changes. Just £630 million goes to the 5.3 million losers from the abolition of the 10p rate.
Francesca Lagerberg, head of Grant Thornton's national tax office, said: "While the Chancellor's plan offers a solution to the political problem it does not offer full compensation to those worst hit by the abolition of the 10p rate, as there are still some who will spend the 2008/09 tax year worse off.
"Furthermore, and rubbing further salt into the wound of those low income earners who have not been helped by the announcement, is the fact that a large number of middle-income earners will benefit from the raising of the personal allowance by £120 as well."
Treasury officials declined to speculate on whether the Chancellor's extra borrowing would tip the Government into breaching the sustainable investment rule introduced by his predecessor Gordon Brown, insisting that such assessments are made only in the PBR and Budget.
But with public finances already extremely tight, the Budget in March forecast debt at 38.5% of GDP this year and 39.4% next year, leaving very little leeway for extra borrowing.
The Institute for Fiscal Studies put the chances of breaching the rule at 50/50, while Jonathan Loynes, of Capital Economics, told the Daily Telegraph: "If the economy slows as sharply as we expect... borrowing will rise much more sharply and the fiscal rules will be comprehensively broken."
IFS director Robert Chote told BBC2's Newsnight: "If you take the Government's fiscal rules at face value, this giveaway just in this year has effectively used up the remaining room for manoeuvre that they thought they had at the Budget.
"The fact that the costs may go on in future years if the Chancellor can't claw this back, makes the situation that much more difficult - there is an unpalatable choice between essentially saying goodbye to the fiscal rules or to create a fresh set of losers and a fresh set of political problems."
Save the Children said that the money could have been better targeted to lift Britain's poorest children out of poverty.
The charity's UK child poverty campaigns manager Phillipa Hunt said: "Three billion pounds would get the Government to its own target of halving child poverty in the UK by 2010. This has to be prioritised if the goal of ending child poverty in a generation is going to realised."
But Age Concern's director general, Gordon Lishman, said the change was "very good news for those pensioners who were set to lose out as a result of the abolition of the 10p tax rate".
Mr Lishman said: "It makes sense for the compensation to be paid through the tax system and increasing personal allowances is by far the fairest and most effective way to do this."