Alistair Darling has earned plaudits in his pre-budget report for playing a bad hand well in dreadful circumstances. Certainly he has avoided the Tory hara kiri option for the economy of making drastic cuts straightaway which would undoubtedly plunge the economy into a nosedive and deepen and prolong the recession. He has tried to protect priority areas like ‘front-line’ education, health and overseas aid (but without revealing how deep the cuts will be in other important areas like housing, transport and the environment), and he has tilted the tax burden towards the richest 2% to protect the lowest incomes, the State pension, and skills training for the young unemployed. But there is a third option which never surfaced and offers a much better and fairer strategy, namely to shift the pattern of tax much more strongly on to the perpetrators of the crisis which combined with a public investment programme in job creation to spur the return to economic growth, plus the axeing of major public expenditure programmes which have never been justified and cannot now be afforded, could avoid unwarranted public sector cuts altogether.
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Darling stated that a combination of stronger growth, tax increases, and a 0.8% increase in spending over the next 3 years would halve the budget deficit – a heroic statement full of caveats on every count. He assumes growth will reach 3.5% by 2011-12, which is distinctly sanguine. Tax increases on VAT and NICs will hurt those on low and medium incomes more than the 50% tax on incomes over £150,000 plus the (highly avoidable) bonus tax on bankers will hurt the rich. A 0.8% increase in spending conceals a pay freeze (i.e. real cuts on low-paid workers in the public sector) as well as huge cuts of some 15-20% in many important public spending areas which the IFS estimates will total asmuch as £35bn. And all this pain only halves the budget deficit of £179bn.
Much better would be to take back most of the ill-gotten gains of the richest 5% over the last decade and a half in order to spare the other 95% of the population the penalties imposed by a deep recession which is none of their own making. That should be done by taxing incomes over £100,000 at 50% and incomes over £250,000 at 60% (not unreasonable when the richest tenth of households now take 51% of national income whilst the poorest tenth take just 3%). Capital gains tax should be raised to the level where Nigel Lawson wisely left it, i.e. at 40% to match the higher rate of income tax so that bankers and the rich do not use accountants to pretend their earnings are somehow capital gains and therefore taxable at less than half the level they should be. A windfall tax on bank profits should be introduced since excessive bank profits now flow adventitiously from Government intervention in quanttitative easing, the tax break which currently allows £80bn of past losses to be set against future tax, and the hugely expanded market in Government bond sales. The indefensible non-dom tax loophole should be immediately closed. A long overdue tax on financial transactions set modestly at 0.001% should raise £30bn a year. And, yes, some public expenditure cuts where wholly justified (Trident, ID cards, and inefficient and vastly over-expensive Government computer projects for a start) wouldraise over £50bn a year.
Think about it, Alistair. It might even win us the election too.

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