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PBR 2008: Analysis - Corporal Jones to UK plc: Don't panic – Dennis Howlett

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24th Nov 2008
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Breaking opinion and analysis on the Pre-Budget Report. Dennis Howlett reveals how Darling's poker face may have been the best thing about his whole speech.

Alistair Darling today issued what many see as the most important Budget statement in living memory. Most of the measures announced: a cut in VAT to 15% from next Monday, an increase in the top rate of tax to 45% for those earning more than £150,000 had been widely telegraphed over the weekend. What was truly eye watering was the extent to which public borrowing will increase: £78 billion now and up to £118 billion in 2009.

Access to funds and more help for small businesses will be welcome. Time to pay all taxes and an extension of loss carryback to three years will help cash flow. But the real question is whether Darling's numbers add up and whether the country will be able to afford to repay the increase in debt. The tax clawback measures leave £8 billion of the £20 billion currently on offer hanging in the wind. More worrying is whether the cut in VAT will make any real difference.

Early commenters are of the view that with High Street prices already under pressure, the reduction will hardly be noticed. Commenters on my personal weblog think retailers will find ways of witholding the reduction in VAT. Martyn Shiner, for example, said:

"If you are a manufacturer supplying UK retailers be VERY afraid at the end of 2009 as they hold prices when VAT goes back up and force their suppliers to take the pain of reduced margins. Obviously Darling has NO understanding of how things work in the real world."

Leigh Caldwell countered: "I suspect the big grocers will be among the least likely to hang onto the VAT cut - they are under the most scrutiny and their prices are rarely anchored at 99p levels. It's other retailers which will get away with doing it - and though a recovery in retail margins might prevent some bankruptcies, it probably isn't the best outcome for the economy."

The Government will no doubt draw comfort from the fact that his Conservative counterpart George Osborne was limited to attacking the government's strategy: "This represents the greatest failure of public policy in generations." The stock markets seemed to like it, recording a one day increase of 9.4% but many attributed that to the Citigroup bailout in the US.

Personally, I'm in agreement with Jeff Randall of the Daily Telegraph who said: "The Chancellor's greatest achievement is to keep a straight face," while delivering his speech. There is no doubt that Darling is taking a huge risk. What happens if the future economic forecasts which indicate a bounce in 2010 prove over optimistic? What happens if the banking community doesn't deliver on helping those under pressure?

What about oversight? Right now, no-one knows for certain. As always, the devil will be in the detail, which we will see in the coming days.

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