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The new 50% tax rate is about securing votes, not revenues

I had a lot of fun today covering the UK Budget over on the Monevator Twitter channel. It was fun racing other finance bloggers and the bloke who does the BBC captions to announce the news.

There were two occasions though when I was late with my updates. Both times it was because I was too annoyed to ‘tweet’ before I’d calmed down. It happened:

  • 1. When the Chancellor outlined the £2,000 scrappage scheme for cars
  • 2. When he revealed the 50% tax rate for those on over £150,000 a year

Both moves were idiotic distractions when the country needs real leadership.

I won’t run through all the other budget details, as they’re everywhere; the FT has a good recount of the speech here, and the BBC has produced an excellent at-a-glance guide to the 2009 Budget, or try this wordier budget recap from This is Money.

I’ll also leave discussing the £220 billion of gilts the Government will issue for a rainier day.

Broadly speaking, I don’t think the budget will hugely affect my own circumstances, except perhaps down the pub, and I actually applaud the new £10,200-a-year ISA allowance.

I understand giving extra money to pensioners, even if I don’t agree that tax credits and other government candy-boxes are the best or most dignified ways to deliver it.

I’m disappointed there wasn’t more money for green energy infrastructure or even just a mission to install loft insulation in every home. Darling’s describing this as a “green Budget” before announcing new incentives for North Sea oil extraction was almost comic genius.

Finally, I hate to see politicians boasting about creating jobs.

From the USSR to China to Japan to the UK, history has shown the best way for government to create jobs is to get out of the way. Let us keep more of our money, and concentrate on making sure regulations prevent companies from harming people and the environment, rather than wasting resources deciding (poorly) what sector deserves government support.

Curiously, the government extended its pointless VAT cut started last year, which I think shows just how confused New Labour now is – because the two announcements that annoyed me most are both a return to the (a) stupid and (b) pointless politics of the Old Left.

Can we scrap the car scrappage scheme before it starts?

First, that ridiculous £2,000 car scrappage incentive scheme.

Virtually all cars bought in this country are made by foreign companies. No problem, if it means we get cheaper, better cars – I’m all for globalisation.

But it also means taxing the UK population to pay for some people to buy more foreign cars is a strange way to improve our finances.

Yes, I get there are cars made in this country, an ecosystem that supports that industry, and also car retailers who are suffering from the downturn.

But why should this industry among all others be singled out? We’re no longer known as a car manufacturing nation, and as I say the profits of a mini-car boom would ultimately go abroad.

People in this country need to save money, not spend it. (Ironically, it’s car makers like Japan and Germany who need to spend). The last thing the UK needs is another consumer boom, but like a junkie who leaves The Priory with his eyes on the ground looking for needles, Gordon Brown seems to be addicted to having us all in debt, whether personally or nationally.

The environmental angle is completely bogus. From memory, about 35% of the energy used by a typical car over its lifetime is spent creating it. So encouraging more new cars isn’t environmentally friendly.

The car scrappage scheme is all about being seen to do something for traditional Labour voters who are angry at the bills run up “bailing out rich London bankers” – never mind the fact a banking system is vital for all of us, or that Northern Rock had a clue in the name. It has nothing to do with supporting Britain’s economy.

Luckily, there’s a good chance the scheme will completely fail because of another socialist bugbear – bureaucracy. According to a chap on the BBC, getting showrooms into the scheme and administering the scrappage payments will take endless form filling.

Perhaps that’s the plan – a job creation scheme out of a Kafka novel?

Even if the pen pushing doesn’t kill it, there’s also the chance that none of the manufacturers will agree to back the scheme with matching funds. None have so far, most likely because the global recession has left car makers rather strapped for cash.

If they wanted to encourage people in to buy more cars more cheaply they could – whisper it – cut prices.

It’s called capitalism, Darling.

The 50% tax increase isn’t about the economy, either

As Tony Bonsignore writes over on CityWire, the new tax rate – which also breaks a manifesto promise – breaks new ground for this Labour government:

This was a budget that would have been inconceivable even six months ago. For the past twelve years spiralling public debt and an open tax raid on the wealthy were anathema to prudent, City-friendly Labour.

Today all that changed, and old, redistributive Labour was back in a way we haven’t seen for since nearly two decades.

In a sense the Chancellor had no choice, given the dreadful state of the public finances, and the fact that the party trails miserably in the polls – barely a year before the next general election. […]

Even then, though, the decision to introduce a new 50% tax rate for those on more than £150k pa, to be introduced from next year rather than 2011, is bold, unexpected and shocking.

I agree with most of that, but not with Tony’s view that it’s a “bold and desperate gamble for the country”.

Rather, it’s a desperate gamble for the Labour party.

By its own admission, the government says the new 50% tax rate will raise about £1.1 billion a year – peanuts in the grand scheme of things, and about the same that will be immediately raised by the increase in fuel duty, according to Nick Robinson’s reading of the red book, although the tax take will go up as personal allowances are reduced and self-assessed tax payments come in.

Is that really worth a return to the old politics of envy?

Don’t get me wrong: I’m no fan of fat cats or jobs for the boys in the boardroom, and I wrote a year ago that bankers would have to pay for this crisis. I don’t think most cityboys justify their huge salaries (I suggest you buy a passive index fund rather than line a hedge fund manager’s wallet) and I think targeted curbs on executive pay are overdue, for shareholders as much as the good of society.

But an across-the-board tax hike hits everyone who earns over £150,000 a year, regardless of how they made the money (at least until they start avoiding it). Entrepreneurs who take risks to create wealth and jobs are taxed the same way as middle-ranking FTSE 100 jobsworths, not to mention certain civil and the heads of spurious public sector quangos.

Most of all, it’s the cowardice that grates. At least the Old Left admitted they were angry about the rich. Having finally fallen back to its old ways, the New Left hasn’t got the guts to admit it’s playing to the same voters in the cheap seats.

“Never waste a good crisis,” said Hillary Clinton. Our leaders were clearly listening.

Don’t get me wrong

You want a final shocker? I’ve voted Labour in the past. I’m a part-time champagne socialist (or maybe an M&S Cava socialist). Despite its silly zero-growth policy, I’ve even voted for the Green Party.

The early years of New Labour were all about reaching out to the likes of me – aspirational people who could also see that the gaps in society were getting wider, that the comprehensive school roofs were leaking and that the vital Thatcher revolution had run too far, and who felt something should be done about it.

I’m hardly a socialist though, and I don’t even agree with central principles such as the sanctity of the Health Service. (It’s an always hungry yet already bloated dinosaur that as a system treats patients like boxes of tomatoes, and I speak as someone who has experienced a lot of it recently).

In short, I believe democracy is best served by changing your mind as the facts change.

The facts have changed.

Our country is mired in debt because Labour presided over a personal and national debt boom and didn’t put money aside before the day of reckoning came.

Well, that day has come, and I reckon it’s time to give the other lot a chance. Yesteryday wouldn’t be too soon to call an election.

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