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How UK tax burden compares
Limited personal and business tax cuts are likely to be included in the pre-budget report next week as part of a wider economic stimulus package, including higher government borrowing and capital spending, Downing Street signalled yesterday.
Gordon Brown's strongest hint yet on tax cuts came as David Cameron, the Tory leader, tried to outmanoeuvre the government by coming forward today with his own tax cuts designed to prevent businesses cutting their workforces during the recession.
In a speech to the Lord Mayor's banquet last night, Brown put his plan for limited tax cuts - expected to amount to less than £5bn - in the context of his call for an internationally coordinated package to boost the impact of interest rate cuts and bank recapitalisation. "This is no time for the old approach of short-term spending cuts in a downturn that would hurt families and businesses today and damage the long- term productivity of the economy," the prime minister said.
He said there was " a growing international consensus that, especially for those countries with low debt like the UK, maintaining public investment is the right approach while allowing a temporary and affordable increase in borrowing to support economic growth".
The Treasury regards any increase in borrowing over its projections in the spring budget as representing a fiscal stimulus. The government planned to cut borrowing by £7.5bn between 2008-09 and 2010-11. Analysts say subsequent tax cuts this year, including in income tax allowances, delayed rises in petrol duty and reduced stamp duty, have added another £3.5bn to the fiscal tightening in 2008-09. The government is likely to increase borrowing by a combination of bringing forward capital spending, maintaining increased tax allowances introduced this summer, and by allowing borrowing to rise due to lower than forecast tax receipts.
Asked about possible tax cuts yesterday Brown said petrol duty had been frozen and some taxpayers were already getting £120 back in their income tax. "What I'm determined to do is get all countries around the world trying to get their economies moving again," he told GMTV.
"And one way you can do that is by putting more money into the economy by tax cuts or public spending rises. But that's something we have got to look at in the next few weeks."
The Conservative leader will propose a two-pronged plan today to encourage firms to hire workers and to cut the number of people on benefit. He is expected to announce that businesses would be given an incentive to hire workers who had been on benefit. This could include exempting firms from having to pay national insurance contributions for employees who had been on benefits during the recession.
The Tories believe their plan is a sensible response to the downturn which will stimulate business while helping to reduce welfare bills.
Cameron will add that his plan would not lead to a reduction in the overall tax burden, because it will be paid for from savings in the benefits budget. The Tories believe that greater savings could be made through reducing the number of people on benefit by introducing a tougher system to encourage people into work.
Brown is expected to suggest at a Downing Street press conference today that the Tory proposal does not amount to a true fiscal stimulus, since it would be self-funding, reflecting greater Tory concern at public borrowing levels.
Cameron said yesterday: "We will be making a very clear announcement about some tax changes that will help to encourage businesses to take on workers and to keep workers."
The Tory leader, who was addressing his party's women's conference, said mass unemployment was not inevitable in a recession.
"There's a certain approach to this which says that however painful this may be, large-scale unemployment is an unavoidable consequence of recession ... In fact, I wholly disagree. Today I want to say the Conservative party will not stand aside and allow unemployment to claim livelihoods and ruin lives on a massive scale. We will not walk on by while people lose their jobs."
He said businesses would need flexibility to cope, possibly by allowing more people to work part-time. "No one wants to see people have to work less hours or have to take time out of the office or out of their workplace," he said. "But actually sometimes it's better for many people ... if the alternative to that is losing your job, then that actual approach is to be welcomed."
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