Budget 2009: Gordon Brown declares class war with tax on high earners

Gordon Brown has been accused of launching a "class war" against Middle Britain as he introduced a new 50 per cent top rate of tax to make the wealthy pay for the catastrophic state of public finances.

Casting aside more than a decade of New Labour ideology, the government broke a key election manifesto promise by announcing an increase in income tax for those earning more than £150,000.

Alistair Darling, the Chancellor, also announced that the highest earners will lose valuable tax breaks on pension savings, as part of a package of measures that will see the tax grab from high earners raising up to £5.5 billion a year - an average of £18,333 annually per person.

The surprise new measures - which mean Britain will have the highest top rate of any major economy in the developed world - came as Mr Darling was forced to lay bare the true extent of Britain's levels of borrowing in his Budget.

In the worst economic forecast since the Second World War, he said he planned to borrow another £700 billion over the next five years, taking the national debt to £1.4 trillion.

Mr Brown and Mr Darling were accused of indulging in party politics at a time of national crisis by seeking to exploit the divide the Tories' on tax policy.

It was also suggested that the Prime Minister was returning to Old Labour policies designed to shore up Labour's core vote ahead of an election next year that he is on course to lose.

Labour MPs in the party's heartlands will welcome the move and ministers will argue that taxing those on very high salaries is popular among many voters.

But in raising the top rate of tax the government risk alienating the middle class voters that swept Tony Blair to power in 1997.

Michael Fallon, the senior Conservative MP and member of the Treasury Select Committee, said: "This is undoubtedly a bit of class war from Gordon Brown. He is stoking up Labour MPs and the party faithful before the election but there is no doubt this is the end of New Labour.

"The higher rate of tax was a compact between both main parties. It was agreed that the certainty that the 40p rate gave was good, but that has now been shattered once and for all."

The new top rate of income tax will be brought in next April, before the likely May election. Gordon Brown had promised in the 2005 election manifesto not to raise to the top level of tax.

It led to fears that there will be a "brain drain" from Britain as higher earners are driven away by punitive levels of tax.

Mr Brown has consistently claimed to have ended "boom and bust". But the true state of public finances and the amount of government borrowing needed to repair them shocked many.

The Government first borrowed money in 1692. It took 300 years for the level of Public Debt to reach £165 billion in 1992, and yet is £175 billion this year alone. When Labour took office in 1997, debt was £350 billion.

Mr Darling - whose second budget co-incided with the release of figures showing unemployment had risen to 2.1 million - claimed that the government's books would be balanced within a decade.

But the Chancellor was accused of painting a rosy picture of how quickly Britain would return to growth. He told the Commons the country would be out of recession by the end of this year.

A report by the International Monetary Fund (IMF) suggested the British economy would continue to decline next year.

As a result it is feared the final borrowing figures could be even higher, since Mr Darling based his plans on an assumption that the UK economy will recover much more sharply than other economists believe.

After Mr Darling's 50 minute speech to the Commons failed to rouse the Labour benches, David Cameron, the Conservative leader, said Mr Brown was leading a "government of the living dead".

George Osborne, the shadow chancellor, said: "Labour is relying on optimistic growth forecasts that have been contradicted by the IMF, and their tax rises fall on the many, not just the few.

"Britain is being overtaxed to pay for Gordon Brown's incompetent overspending."

The Confederation of British Industry, the country's leading business group, also attacked the Budget for failing to grasp how Britain was going to recover from the recession. Richard Lambert, the CBI director general, said: "The key question for this Budget was whether it set out a credible and rigorous path for restoring the public finances to health. The CBI's preliminary judgement must be that it does not."

He said the Treasury had missed an opportunity to look at curbing public sector pay and pensions.

The move to a 50 per cent top rate of tax - which also effects income from share dividends - marks a departure from the era of New Labour in which Tony Blair and Mr Brown sought to woo Middle Britain by keeping the top rate of tax low. The 40 per cent rate was a staple of consecutive Labour manifestos.

Yvette Cooper, the Chief Secretary to the Treasury, tried to defend the move. She said it was the right response to "exceptional circumstances".

Asked whether the hike represented a breach of the 2005 General Election commitment not to raise the "basic or top rates of income tax in the next parliament", she said: "Well, it is. We never expected that we would have this kind of global financial crisis on a scale not seen for almost a century.

"In those circumstances, what we need to do is to make sure we are being fair."

Mr Darling hopes that the measure will raise £7 billion a year in five or six years time. But financial experts questioned whether the hikes would bring in the revenue predicted by the Treasury.

Robert Chote, director of the independent Institute for Fiscal Studies, said that the tax hike may actually lose the Exchequer money.

He said: "If you look at what happened when higher rates were last changed in the 1980s, that might lead you to suggest that such a move might actually lose you revenue, rather than gain it, as people actually declare less income for tax."

Sean Drury, of accountants PricewaterhouseCoopers, warned that the wealthy might decide to leave the country. He said that from next Spring the UK would rank 18th among the G20 economies in terms of income tax and social security rates for senior executives.

He added: "Countries like Switzerland will look increasingly attractive to some of the people in the key industries needed to lead the UK out of the recession.

Mr Darling had told MPs that he wanted the City of London to retain its status as a centre of financial services, but Stuart Fraser, policy chairman of the City of London Corporation, said the new higher rate could put the Square Mile at a disadvantage compared with financial centres overseas.

He said: "The new top rate of income tax at 50 per cent may damage the City's competitiveness - we operate in a global market for talent, and that talent is expensive."

David Cameron will now come under pressure from his own MPs to oppose the new 50p rate. The Tory leader attacked the move in the Commons, but he will not agree to reverse the measure if he wins the election.

Mr Osborne wants to make sure the next lection is fought on tax rises for the many - the proposed national insurance rise that his scheduled for after the election - and not tax rises for the few.

Source: The Telegraph

Bankrupt Britain: 340 people go bust every day

BRITAIN is facing a bankruptcy timebomb with a record number of individuals and companies predicted to go bust this year.

Begbies Traynor, the insolvency and restructuring group, reckons more than 35,000 firms could go under this year – equivalent to more than 95 a day. The figure would be 18% higher than during the previous peak in the 1990s crash. Nick Hood at Begbies said he would not be surprised if the number rose to 40,000 by the end of the year.

Begbies forecasts that as many as 125,000 people will go bust this year – well above the 107,000 peak in 2006 – equivalent to 342 people a day. Richard Goodwin, editor of The London Gazette, the newspaper of record that prints personal and corporate bankruptcy notices, said pagination had reached a record last month – averaging 96 pages a day – up from 85 last year and 78 in 2007.

Hood told The Sunday Times: “The rate is accelerating – on a bad day we could see 20 businesses going under a day. Companies [you couldn’t imagine going bust] in the last recession are going to the wall this time round – a Chinese restaurant next to a university campus or a hairdressing salon.”

He added: “It feels much worse than the 1990s – there are much fewer options to rescue businesses today. In the past you could go to another bank or small-business owners could remortgage and use equity from their homes – today that is next to impossible.”

The bankruptcy boom comes seven years after the Labour government tried to remove the stigma of going bust through the introduction of the 2002 Enterprise Act, which made the process much easier.

Critics claim the act created a mood of easy credit with no downside.

In America an average 5,945 bankruptcies were filed each day last month by troubled consumers – the highest level since October 2005.

The news comes as a report released today by Ernst & Young, the accountancy firm, shows quoted companies in Britain issued 117 profit warnings in the first quarter with worse to come.

The first-quarter figure for warnings was the highest since 2001, and the third consecutive three-month period in which there had been more than 100 warnings.

Keith McGregor, restructuring partner at Ernst & Young, said: “It is not just the number of warnings that concerns us. The tone of company statements has also darkened.

“The prospects for 2009 appear asuncertain and as gloomy as at any point in the crisis.”

The highest warning sectors were support services, with 22; media, 13; industrial engineering and software & computer services, with 10 each; and general financial,9.

Ernst & Young said the fact that so many different sectors were being affected reflected the spread of the credit crisis into a full-blown recession.

Also today, Hay Group, the consultancy, predicts more than 600,000 job losses as companies retrench. On the basis of a survey of 140 of the top 1,000 firms, it discovered “unprecedented” cost-cutting which it said threatened to do long-term damage to the economy.

Nine in ten firms plan operational cuts in 2009-10, it found, with a high proportion planning job cuts. A fifth of companies intended a big restructuring of their businesses in response to the recession.

Almost half of large companies plan to reduce headcount by an average of 10% this year.

Source: Times Online

How will Gordon Brown pay back the national debt?

As many economists start to turn vaguely positive on the UK economy we may be on the verge of a recovery in business levels. While this news has, and will continue to be, well received by business leaders and the stock market, there are still severe concerns as to how Gordon Brown will pay back the national debt which is literally crippling the UK budget.

While many are awaiting the announcement of this month's budget, it is the short to medium term situation which is beginning to cause most concern amongst experts. Nobody is quite sure how much UK debt has been accumulated over the last 12 months as Gordon Brown has been literally throwing money at the system and UK banking companies. Despite repeated requests by opposition parties and business leaders, the Treasury has been unable to confirm the exact position and balance sheet of the UK.

Whatever the exact figure may be there is no doubt that UK taxes will increase in the short to medium term with some analysts suggesting this could cause a significant drag on the recovery of the UK economy. Until we know the exact balance sheet of the UK it is impossible to suggest any course of action and when consumers and businesses may be hit by increased tax bombshells.

Coming to a bank near you: the 9% mortgage

If, like me, you’re holding out for cheaper fixed mortgage deals, last week’s review of the global banking crisis by Lord Turner, chairman of the Financial Services Authority, showed just how long a waiting game it could be.

Buried in the report was a startling figure: mortgage rates can stay high for six to nine years after the onset of a banking crisis.

Turner wants banks to hold much more capital to prevent the failures of Northern Rock, Bradford & Bingley and Halifax Bank of Scotland from being repeated.

A laudable aim, of course, but this being the banking sector, customers will ultimately pay. Holding more capital increases banks’ costs, which are in turn passed on to you and me in the form of a wider spread between the rates paid on our savings and the rates charged on our debt.

Indeed, the margins on tracker mortgages are now so fat that the 9% mortgage may not be far off. Nationwide building society has the biggest margin on a tracker mortgage, according to brokers.

Its two-year deal for those with a deposit of at least 15% is 4.58 percentage points above Bank rate, or 5.08%; its three-year deal has a margin of 4.53 points, or 5.03%.

These rates are pretty poor with Bank rate at just 0.5%, so imagine how bad they’d look if interest rates were back at a more “normal” level of, say, 4%. That would give you pay rates of 8.58% and 8.53% respectively.

It may seem odd to be thinking about higher interest rates when the country is set to fall into deflation on Tuesday, but rate rises could be closer than we think.

Investors are at their most optimistic about the global economy since December 2005, according to the latest survey of fund managers from investment bank Merrill Lynch.

For the first time in more than three years, investors are not predicting lower global growth over the next 12 months, thanks largely to renewed optimism about China.

Indeed, last week saw a strong rally in all the assets you would normally associate with stronger growth — and therefore higher interest rates. Oil soared 7% in one day alone, breaking the $50 level, while copper surged to a four-month high.

Having shamelessly widened the spread between mortgage rates and the cost of funding as interest rates have come down, banks are unlikely to close the gap again as rates head back up — as Turner’s report highlighted.

The best two-year fix, from First Direct at 2.99%, is currently 0.8 points above the cost of funding; six months ago, the margin was only 0.24 points, according to figures from Savills Private Finance.

The best tracker — 2.89% from First Direct — is 1.1 points higher than wholesale rates.

So should you be locking into a fix now to protect yourself from these big tracker margins? Melanie Bien at Savills thinks so — but for five years, not two. Abbey, part of Spanish giant Santander, is offering a five-year deal at 3.95% with a £995 fee — if you have 40% equity. “Anything at below 5% for a five-year fix is pretty attractive,” said Bien.

Ray Boulger over at rival John Charcol gives a politician’s answer. If you’re buying a property, he would also lock into a fix now — particularly if you have a relatively small deposit. If you play the waiting game on a tracker and house prices fall further, you may find you don’t have enough equity when you try to switch to a fix in a year or so. If you’re an existing homeowner on your lender’s standard variable rate, however, he says there is no need to rush as the chances are the SVR is lower than the current fixed rates.

There are big dangers with this approach, though — when rates eventually rise, they may do so quickly. “If \ are to avert inflation, interest rates will need to be raised earlier into any upturn and more rapidly than in the 2003-5 period,” said Max King, economist at Investec.

Work out how much more you’d pay on a fix, compare it with what you were paying before interest rates started falling, and if it’s a price you’re willing to pay for long-term security, then it’s time to fix.

Source: Kathryn Cooper Times Online

UK will have the worst deficit in Western world, warns IMF

Britain is now tumbling towards the biggest budget deficit in the Western world, the International Monetary Fund has warned.

Next year the Treasury will have to borrow a record 11pc of gross domestic product as it fights the crisis – equating to more than £150bn and far more than has ever been borrowed before in British history, according to a devastating new assessment by the Fund. The assessment coincided with the publication of official figures showing a further deterioration in the public finances during February as the recession ate further into tax revenues.

The IMF also confirmed, as had been leaked earlier this week, that it now expects the world economy to shrink this year for the first time since the Second World War. It also expects the UK to endure a more severe and longer-lasting contraction than almost any other major economy.

However, it is its analysis on the state of Britain's accounts that will cause the most consternation in Whitehall and beyond. The Fund predicted that the UK's government borrowing balance would reach 9.5pc of GDP this year, before rising to 11pc of GDP next year. This is greater even than the US, which is embarking on the biggest fiscal spending spree in history, despite the fact that Gordon Brown has been unable to carry out any major tax cuts or spending increases of his own, save for the temporary cut in VAT.

The parlous state of Britain's finances is due instead to the billions of pounds of taxes lost because of the collapse of the financial services industry, and to the extra costs associated with higher unemployment. The Treasury's figures showed that in February the budget deficit reached £9bn, taking the total deficit for the first 11 months of the fiscal year to a record £75.2bn – more than triple last year's total.

The IMF projections will further increase the resistance within the Treasury to prospective tax cuts which, it is thought, are being pushed for by Number 10. Moreover, they do not take into account losses associated with the various bail-outs of the financial system.
Shadow Chancellor George Osborne said: "These dreadful figures show how the Labour government has given us the worst public finances in the developed world.
"The figures also show Britain simply cannot afford a further discretionary fiscal stimulus – our automatic stabilisers are already amongst the biggest in the world."

Updating its forecasts for world economic growth, the Fund said the global economy could shrink by as much as 1pc this year – the biggest contraction in more than 60 years. Britain's recession is expected to last until next year, in contrary to Alistair Darling's forecast that the economy will start to grow as soon as this summer.

Source: Edmund Conway, Telegraph