Tax Is The Way To Prevent:Recession,Gordon Brown

November 24, 2008

browndarling226paBorrowing billions to cut taxes is the only way to prevent a long lasting recession, Gordon Brown has said.

Unveiling a major shift in Labour’s economic policy, the PM said: “Extraordinary times require extraordinary action.”

The pre-Budget report at 1530 GMT is set to include a cut in VAT from 17.5% to 15% – paid for in part by a new 45% tax rate on earnings over £150,000.

The Tories warn it might not work and will create a future “tax bombshell”.

But Mr Brown said: “To fail to act now would not only be a failure of economic policy but a failure of leadership. Doing too little too late would mean more damage and more deterioration.

“The loss of vital successful businesses. And it would mean a weaker economy, lower growth, eventually greater fiscal problems, and in that event higher interest rates and higher taxes.”

He said the economic “dogma” that had dominated the past 20 years was over as deflation – rather than inflation – was now the biggest threat to the economy.

And he said he did not want to repeat the mistake of previous governments when “failure to take action at the start of the recession has increased both the length and depth of the recession”.

“The best way for taxes to be lower in the long term is for us to ensure that the downturn is as limited in its length and scope as possible,” Mr Brown told the CBI conference in central London.

He said the borrowing needed to fund tax cuts would be paid back through further efficiency savings and sale of government assets.

The scale of the sums the government needs to borrow to fund its planned £15bn to £20bn stimulus package are thought to be unprecedented outside wartime.

And there are concerns it could further hit the value of the pound – the cost of insuring against the British government defaulting on its bonds, a measure of the markets’ confidence in sterling, has crept up and is second only to Italy among the major industrialised nations, the BBC Economics Editor Hugh Pym said.

‘Symbolic significance’

Chancellor Alistair Darling is expected to outline a series of immediate tax cuts in the pre-Budget report to boost the economy.

He is expected to cut VAT from 17.5% to 15% – the lowest level allowed under EU law – in a bid to get consumers spending again.

Mr Darling is also expected to outline how that money could be paid back in future years through a combination of slowing growth in government spending and tax increases.

But he will also announce that a new 45% rate on earnings over £150,000 will be brought in if Labour win the next election.

Such a move would mark the end of New Labour’s long-standing pledge not to increase people’s income tax rates.

BBC political editor Nick Robinson said the increase in the top rate of tax was of “huge symbolic significance”, but stressed it would only raise a fraction of the sum needed to get the public finances back in order.

Cameron ‘sceptical’

The fact that it would only be brought in if Labour won the next election, meant the party would be able to claim it had not broken its 2005 election promise not to increase income tax rates.

It is unclear how much a new tax rate could raise, but a Treasury answer to a Parliamentary question in 2006 suggested a 45% rate on people earning more than £150,000 would have raised £1.2bn.

The prime minister has so far refused to confirm a VAT cut from 17.5% to 15%, but did say there would be “substantial” measures to pump money into the economy.

Conservative leader David Cameron told the CBI conference he was “sceptical” about the government’s stimulus plan, arguing it could hold back further interest rate cuts and warning that temporary tax cuts now would lead to permanent tax rises later.

“They might be talking about tax giveaways but everybody knows that they’re throwing money at us now, to take away at a later date.

“That is the thing about debt, you’ve got to pay it back sooner or later. And to pay back all this money would mean an 8% rise in income tax or a 6% rise in VAT or a corporation tax rate of 71%.”

He said Labour claims the Tories would do nothing were “complete rubbish” adding the party would freeze council tax, allow companies six months to pay their VAT bills, cut the tax rate for small business and introduce tax breaks for job creation. The party would pay for the cuts with a reduction in public spending growth.

Lib Dem treasury spokesman Vince Cable said: “Now that the government has finally realised that the tax system is unfair and hits those on low incomes the hardest, ministers should focus their efforts on closing loop holes and removing tax advantages that the richest currently enjoy.

“The avoidance opportunities and reliefs become even more important if a higher tax rate is introduced.

“By itself an increased tax rate on those earning over £150,000 would only raise negligible amounts of additional revenue.”

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