Double Whammy

The arguments over the 10p income tax band continue with Brown begging Labour MPs to hold firm. You know when it’s serious when Denis McShane (former Europe Minister and Labour hardcore loyalist) is in front of TV cameras to fly the flag for Brown. It looks bad inside the Commons Chamber and it looks bad outside it.

“Fiscal drag” is an issue linked to this. In short, it’s where increases in wages are greater than increases in the personal tax allowance. The personal tax allowance is automatically linked to the Government’s preferred inflation figure (around 2.5%). Wages have increased by somewhere closer to 4%. Due to this imbalance, many peoples incomes will increase above the personal tax allowance limit and will end up paying tax for the first time, or will end up paying more in tax, even though they are working the same number of hours. The National Minimum Wage is a case in point, having increased way above inflation since its creation.

The brilliant thing as far as the Treasury is concerned is that it gets more tax revenue without having to actively tax for it and therefore having to point out how and why the public is suddenly paying more tax, leading to such outrage as we are seeing from many low paid workers and Labour MPs. It’s part of the reason why the problems with the wider public finances has held back as long as it has. The bad thing is that the Government forgot that the economic cycle cannot be abolished. At some point there has to be a downturn and the Government needs to have sound finances to ensure they can ride it out. Their high spending has left public finances in a less than pristine state, particularly dangerous if the downturn is delayed.

The Government has realised this but only as the credit crunch slammed into the American housing market and has found itself rushing to restrain public sector workers wage increases, with multi-year deals at a mid-2% increase. The Unions though aren’t happy, giving the Government another problem since Labour needs the Unions onside in light of a General Election in the next two years.

Fiscal drag has been of enormous benefit to the Treasury, giving it billions of pounds it could have used to balance the books. Removing the 10p band simply makes the problem of fiscal drag worse by beating the low paid again.
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Stephen Ladyman MP has commented on the “fuss” saying “it is wrong that even this small group should be worse off” and that he will be bringing his concerns of this group to the Chancellor. Will he explain why he didn’t bring these concerns up before and instead voted in favour of the changes without question when they came through Parliament last year?