Brown has painted himself into a corner

The Budget leaves nothing for a rainy day, says Vincent Cable

One positive consequence of Gordon Brown's rather conservative economic stewardship is that this is the first Labour government not to face a budget crisis. A broadly neutral Budget was expected, was delivered and opens the way to a further reduction of the interest rates when the Bank of England Monetary Committee next meets.

A hyperactive and creative Chancellor is using a full range of the tax keyboard to encourage work, investment, innovation and environmental sustain- ability as well as to achieve that most elusive of goals: fairness.

A problem with tax activism, however, is that measures which may be individually admirable are collectively contradictory. It is now possible to pay income and capital tax at 60 different rates. The Budget advertised a 1p income tax cut as an incentive to work, but has created a dis-incentive of high marginal tax rates for those with children who are entering the higher rate tax band, because of the effect of the new children's tax credit.

The first main theme of the Budget is the restructuring - and cutting - of tax for those on low incomes. But the much-publicised 10p tax rate is a poor, badly targeted policy. It benefits the top 20 per cent more than any other group and barely 10 per cent of gains go to the poorest 40 per cent of householders. A better approach would have been to lift poor people out of tax altogether. A bolder budget would have raised allowances by a third or more: say to pounds 5,600 from pounds 4,195. This would have taken 2.75 million people out of tax. It would have cost pounds 7bn compared to some pounds 4.8bn for the 10p band.

I favour some honest rather than covert income redistribution. Rich taxpayers should pay a 50p rate on taxable income over pounds 100,000, bringing in perhaps pounds 2bn. Two decades of regressive policy on income distribution have produced a highly skewed outcome. The top 5 per cent earn as much as the bottom 50 per cent of taxpayers. There is a general sense of unfairness aggravated by large payouts to "fat cats". A modest step to tax the highest incomes would hardly drive out managerial talent; remuneration packages would be up-rated by employees anxious to keep valuable, foot-loose staff. By ruling out such a higher rate of tax, the Chancellor has blunted his drive for fairness.

A second structural change is the promised tax on energy use, offset by lower payroll taxes (employers' NICs). The principle is fine but the details are sketchy and those that exist are worrying. The household sector is arbitrarily excluded for political reasons. Energy intensive industries with lobbying muscle may well be. As currently drafted, the proposal is not for a carbon, but a general energy tax, defeating the objective of fuel switching. If it is badly designed, this new tax could give "green taxation" a bad name.

A third thrust is towards "supply side" incentives for business. Measures such as a lower rate of corporation tax send the right signal. And the parallel emphasis on tougher competition policy is surely right. But the panoply of tax breaks is more questionable. The much-heralded 10p corporation tax is tapered after a mere pounds 10,000 of profit (and is postponed for three years). Business is also discovering nasty little surprises in the small print, such as VAT on out-sourced services.

Last, but not least, the Government has entered an auction with the official Opposition to bid down the basic rate of income tax. This earned the Chancellor rave reviews in The Sun and The Express. But the implications are serious. The 22p rate will cost pounds 2.8bn in the next financial year, which could have been used for financially stretched public services.

More seriously, inter-party tax competition will make the long-term task of funding growth in public services such as education and health more difficult. The pre-announced tax cut also betrays a streak of recklessness. If the economy, and public sector finances, deteriorate unexpectedly, he has greatly reduced his freedom of manoeuvre.

n Vincent Cable MP is the Liberal Democrats' finance spokesman and former chief economist at Shell

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