Britain to lift top income tax rate in 2011

The British government cut the basic sales tax Monday to help boost consumer spending as the economy slides into recession, and proposed a higher rate of income tax for the biggest earners if it is re-elected.

In his pre-budget report to legislators, Treasury chief Alistair Darling said the Value Added Tax (VAT) will be reduced to 15 percent — the lowest level allowed under European Union laws — from the current 17.5 percent until the end of 2009 in an attempt to kick-start the economy ahead of the crucial Christmas trading period. The cut will be effective on Monday.

That move will save an average consumer around 200 pounds ($300) but cost the Treasury around 12.5 billion pounds ($18.5 billion) at a time when borrowing is already at sky-high levels amid falling tax revenues from individuals and businesses and rising unemployment payments.

Darling said the 20 billion pound ($30 billion) package of fiscal stimulus measures — which amounts to around 1 percent of Britain's gross domestic product — would also include increases in tax credits and welfare payments and involve bringing forward 3 billion pounds of capital spending from 2010 to now.

He predicted the measures will make the recession "shallower and shorter" than would otherwise have been the case, though he expected the British economy to contract between 0.75 percent and 1.25 percent in 2009 after growing 0.75 percent this year. The measures outlined Monday will help the British economy to start growing in the second half of next year, he added. In 2010, Darling forecast that the British economy will grow by between 1.5 percent and 2 percent.

"These are exceptional times and require exceptional measures," said Darling.

Other countries are expected to unveil their own economic support packages soon. President-elect Barack Obama, for one, has hinted that one of the first things he will do when he enters the White House in January is to push through a stimulus package worth more than the $175 billion he proposed during the presidential election.

As well as trying to boost the economy quickly, Darling sought to provide a roadmap to getting the public finances back into shape in the medium term. He said the budget will be back in balance by 2015/16.

He said a new 45 percent tax rate will be introduced in April 2011 for those earning more than 150,000 pounds ($225,000) a year, though that depends on whether the governing Labour Party is re-elected after the next election, which has to be held by June 2010. The current top rate of tax is 40 percent and has not been changed since Margaret Thatcher's government slashed it from 60 percent in 1988.

The planned tax increase is part of a package of measures from the government to reduce borrowing in the years ahead and assuage market fears that the public finances are out of control. Darling said public sector net borrowing, the government's preferred measure of the public finances, will hit a staggering 118 billion pounds in 2009/10, or a record 8 percent of gross domestic product, and up from 78 billion pounds in 2008/9.

In the financial year 2011-12, the Treasury said the government would claim an extra 4 billion pounds in taxes, with around 3 billion pounds paid by the country's top earners in higher income taxes and larger national insurance contributions. Rises on duty for cigarettes and alcohol from 2011 would bring in another one billion pounds, a Treasury spokesman said, on condition of anonymity, in line with government policy.

Those earning under 40,000 pounds will be better off under the changes, but those earning between 40,000 and 10,000 pounds will pay an average of 156 pounds extra in tax per year, while those earning above 100,000 pounds will pay much higher taxes, the spokesman said.

Darling also said the government will be striving for a further 5 billion pounds worth of efficiency savings and consider a crackdown on tax havens such as the Isle of Man and the Channel Islands

Overall, Darling said net debt will rise to 48 percent of gross domestic product in 2009 from 41 percent this year. Though that level is way below other countries, such as the U.S., Japan and France, debt has been rising from around the 30 percent level just a few years ago. Darling said net debt will peak at 57 percent of gross domestic product in 2013/14.

Darling's plan is likely to have a profound effect on the political debate in Britain ahead of the next general election especially as the Labour government has been elected three times in a row since 1997 promising not to raise income tax rates.

The opposition Conservative Party has warned that the government's "borrowing binge" may not work and would result in a "tax bombshell" in the years ahead.

"It will make the recession worse because it will make the recovery harder," said George Osborne, the Conservatives' Treasury spokesman.

The markets appear to have taken the opposition's warning in their stride, though, as the FTSE 100 index of leading British shares closed up a massive 9.8 percent at 4,152.96.

But economists are sceptical that the measures outlined Monday will have as much of an effect on the economy as Darling predicted, especially if banks remain wary of lending despite government efforts to shore up their finances.

"He will need the banks to resume lending and also require the world economy to pick up," said Douglas McWilliams, chief executive of the Centre for Economic and Business Research in London. "Basically he has to keep his fingers crossed and also his toes.

Others said they would have preferred Darling to have announced a real terms freeze in government spending.

"Taxes in 2011 and beyond may need to rise even further than announced today in order to put the public finances back on a sound footing in the medium term," said John Hawksworth, head of macroeconomics at accounting firm PricewaterhouseCoopers.

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Associated Press writer David Stringer in London contributed to this article.

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On the Net:

U.K. Treasury, http://www.hm-treasury.gov.uk/

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