Tax package 'may break debt rule'

9:35am Wednesday 14th May 2008

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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.

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 (this) 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.

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."

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