View from City Road: Tax blow needs interest rate shock absorber

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We are into the era of negative tax coding, and in a big way for some of those with company cars. The coding notices that have landed on doormats this week - in some cases more than once, since the Inland Revenue keeps revising its calculations - are the harbingers of a financially stretched spring.

No wonder tax offices are being deluged with outraged calls from those who believe there must surely have been some mistake.

The biggest single shock for anyone who has forgotten the Budget details from last year is on company cars, of course. From April, 35 per cent of the new value of the car will be deducted each year from tax allowances. For middling to expensive cars, that is enough to offset the other allowances.

Even before the Inland Revenue posted its letters, the Government and Opposition MPs were becoming increasingly excitable as the implementation date for the tax increases in April approached. But the evidence so far has been that consumers have been phlegmatic.

The latest Gallup survey even shows consumer confidence rising strongly and people happier to make large purchases than in any month since August 1988.

In fact, that tells little about the real effects of tax rises. It simply confirms that the pattern following Norman Lamont's swansong Budget in March has been repeated after Kenneth Clarke's inaugural effort in November. Confidence dipped following the announcement of the measures, only to recover in the following month.

That is no reason for the Treasury to be complacent about the effect of tax changes on the economy. Consumers are nowhere near as rational and far-sighted as theoretical economists like to believe. There is likely to be a two-stage raising of consciousness.

First, several hundred thousand company car drivers may be persuaded to draw in their horns soon, to make provisions against the lower pay cheques that will arrive from April onwards. There will be such a large difference in some tax codes that they will for once be read carefully and absorbed, rather than shoved into a file and forgotten.

For most others, it will only be when fuel bills rise and pay slips shrink in April that they realise the scale of the damage to their finances and cut spending. Mr Clarke should get his defence in first and cut interest rates now.