Outlook: Taxing challenge makes for easy rates decision

BAE Systems; Schröder's header
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The Independent Online

Does the Monetary Policy Committee's decision to leave interest rates on hold mean it knows what the Chancellor will do in his Budget on 17 April? When interest rate decisions are taken just prior to the Budget, it has become customary for the Treasury to brief the Bank of England on the broad outlines of the fiscal changes planned, so that they can be taken into account in determining interest rates.

It's a good theory, but as it happens, there was no such pre-briefing this time around, and the MPC was largely flying blind in deciding that it is still too early to raise rates. Not that you need to be able to see to know that the Chancellor is planning a tax raising Budget. The only point of debate is precisely how much he's going to need in extra tax to finance his spending while at the same time staying within his own rules for fiscal discipline.

The Institute for Fiscal Studies puts it at £5bn if he is to retain the present level of comfort in the public finances. Others think he can afford to borrow more and tax a little bit less, but that he will be raising taxes to some degree is not in doubt. The surveys suggest that voters may be prepared to pay higher taxes if they can be certain it will lead to better provision for health, education and transport. Perhaps unfortunately, what people say in surveys and what they will accept in practice are two very different things, and the Chancellor knows better than most that any tax raising whatsoever will go down like a lead balloon.

In his first five years as Chancellor, Gordon Brown has cleverly managed to raise the tax burden on the economy quite significantly while at the same time leaving the headline rates of tax unchanged, or in the cases of corporation tax and the basic rate of income tax, actually cutting them. Instead, he's gone for what the Tories call "stealth taxes", such as the abolition of the tax credit on dividends, which raise a lot of money and have been a considerable cost to business and pensions, but which ordinary people don't immediately feel in damage to their pockets.

The trouble is that there is a limit to what can be achieved through stealth, and with corporate tax receipts on the wane because of falling profits, the Chancellor needs to find something substantial, as well as more up-front, to plug the gap and pay for the extra spending.

On several occasions over the past five years, the Chancellor has raised the ceiling for National Insurance contributions by more than the rate of inflation. That remains a likely target for this Budget too. By raising the ceiling from the present £29,900 to £33,935, the level at which people start paying the top 40 per cent rate of tax, the Chancellor would raise an extra £900m. In addition, he might raise the rate of National Insurance from 10 per cent to say 11 per cent. This would be even more effective, raising £3.3bn.

In isolation, both measures would be seen by Labour backbenchers as retrogressive, since they would hit those paying basic rate tax disproportionately harder than those on the top rate. One way round the problem would be to get rid of the ceiling entirely, the effect of which would be to raise the top rate of tax from 40 per cent to 50 per cent. That would have the Daily Mail really rocking in the aisles, and whereas anything is possible, it doesn't seem likely the Chancellor would risk such a sea change in tax policy.

Whichever way he jumps, it's not going to be easy. Having made such a noise about his pro-enterprise agenda, it would be disingenuous of the Chancellor to raise the burden of tax on business again. This time it has got to be personal. The MPC is right to wait and see which way the land lies before moving on interest rates. Some time soon, they are going to have to rise, but let's just see what damage the Chancellor is going to do to the economy first.

BAE Systems

We know that John Weston did not jump from the cockpit at BAE Systems last week. But we still do not know why he was pushed and the publication of the company's latest annual report and accounts yesterday singularly fails to cast any further light.

BAE should have pulped the report and started over again with a clean sheet, an explanation for why Mr Weston had gone and perhaps even, a glimpse of the pay-off he will get for 32 years of unstinting service to the company.

Instead shareholders will be confronted with a smiling picture of Mr Weston and a glowing tribute to all his achievements last year at BAE when their copies start to drop through the letterbox any day now. Close you eyes and you would be forgiven for thinking that the fulsome praise heaped on him and BAE's strategy by the chairman Sir Dick Evans ought to have made Mr Weston indispensable.

So pleased was the company and the remuneration committee with his performance that it awarded him an extra bonus for beating his targets last year.

But that was way back in early March when the directors signed off the report and sent it to the printers. A lot plainly happened in the following four weeks to turn Mr Weston from flavour of the month into a boardroom liability who was prevailed on to resign with "immediate effect".

Since then, the BAE spin machine has worked itself into a frenzy trying to explain Mr Weston's departure. In no particular order, we have been told he was prone to tearful outbursts, that his bullying of the Ministry of Defence had become too much and that he had the right "skill sets" to mould BAE into what it is today but not to take it forward. Pick the bones out of that.

Sir Dick is now firmly back behind the controls which means that Mr Weston's successor, Mike Turner, will be double guessing his new job until a new non-executive chairman is appointed. BAE should get on with the search without delay.

Schröder's header

Pay-TV platform in dire financial straits threatens to renege on its contract with the football league. Sounds familiar? Well it could be ITV Digital but actually this week's wooden spoon for being unable to afford football rights agreed in more profligate times goes to the Kirch Group, which owes Germany's top football clubs £123m and has no prospect of paying. There is one key difference, however. The German Government yesterday promised to bail out the affected football clubs if Kirch does indeed fail.

Since that was last night thought to be not so much a question of if as when, it is virtually certain that the special loan fund will be drawn on. Well, Gerhard Schröder, the German Chancellor, is a football fanatic and this is an election year, but the contrast with the British Government, which has washed its hands of the Football League's problems with ITV Digital, could scarcely be more startling.

State aid for business in all its various guises is hardly ever to be encouraged, but to dole it out for the beautiful game is just laughable. The German Government was at pains to stress that no tax payers' money would be involved, only loan guarantees, but a spade is a spade and to have a loan underwritten by the state is the same thing as being bailed out by it. Germany needs a big bankruptcy to bring its sclerotic economy to its senses. There's not much evidence of change in this blatant piece of pork barrel politics.

j.warner@independent.co.uk

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