Economists have warned that changes announced by the Chancellor to personal tax allowances as compensation for the abolition of the 10p income tax rate may have consequences for the economy.
By increasing the personal allowance for basic rate taxpayers to £6,035, Mr Darling will provide some 22 million lower paid taxpayers with an extra £120 a year.
The Chancellor told MPs in his statement that eight out of ten of the 5.3 million households that had lost out through the scrapping of the 10p band would be fully compensated, while the other 20 per cent would be compensated by at least half.
To make sure that higher rate taxpayers are not affected by the changes, Mr Darling also reduced the threshold at which someone begins to pay higher rate tax.
The higher rate threshold will be cut by £1,200 from £36,000 to £34,800, so that the higher rate band now starts at £40,835.
The cost to the exchequer of the changes is going to be £2.7 billion, a sum the government plans to borrow.
Analysts have argued that the extra borrowing, although relatively small compared with the overall borrowing requirement, may yet have economic repercussions.
Jonathan Loynes, of Capital Economics, said: “With the fiscal position already extremely tight, it could make an important difference. If borrowing is now £2.7 billion per year higher than previously planned for the next three years, that would raise the level of public sector net debt by some 0.5 per cent of GDP and hence push debt above the 40 per cent ceiling specified by the sustainable investment rule in 2010-11.”
Mr Loynes added: “Of course, Mr Darling might argue that other factors like high oil prices will have an offsetting downward effect on borrowing and debt. But if the economy slows as sharply as we expect, this will all be irrelevant – borrowing will rise much more sharply and the fiscal rules will be comprehensively broken.”
Date:14 May 2008
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