Pendle MP Says the Government Will Act on 10p Fiasco - Gordon Prentice

Gordon Prentice - Pendle's Campaigning Labour MP

Pendle MP Says the Government Will Act on 10p Fiasco

Written by Gordon Prentice

Wednesday, 02 July 2008 00:00

Pendle MP, Gordon Prentice, said last night he was satisfied that the Government will act to reimburse all those who lost out as a result of the 10p tax rate abolition. There are still over one million households which have not been fully compensated.

The MP was backing an amendment to the Finance Bill (which puts the Budget into law) which would have forced the Government’s hand. But an assurance from Treasury Minister, Jane Kennedy, meant the amendment was not pressed to a vote.

The MP said: “The 10p tax fiasco has badly damaged the Government’s credibility. It is important it is put right.”

“I also want to see a detailed impact assessment of the effect future tax changes have on individuals and families. This is something the Treasury Select Committee has recommended.”

“I am fed up with rabbits being pulled out of a hat with the intention of dazzling us all. That is the old, discredited way of doing things. After the 10p blunder we all need to see the small print.”

Note to Editors: The summary of the Treasury Select Committee report, Budget Measures and Low Income Households, reads:

Low-income households and the abolition of the starting rate

We have received and summarised very detailed information on the size and composition of the group of people who stood to lose from the removal of the starting rate of income tax as initially implemented. The losers from the measures as initially implemented were people whose taxable income was small, and for whom the loss might be significant when required to manage a personal or household budget at a time of sharply rising prices for many essential goods and services.

Options for 2008-09 and the changes announced on 13 May 2008

The problem arising from the removal of the starting rate of income tax was based within the tax system, and required a tax solution. For the current tax year, in the circumstances which the Chancellor of the Exchequer faced, the option chosen on 13 May of increasing personal allowances, but confining the benefits to basic rate taxpayers, was probably the least bad option, with the benefits of simplicity, transparency and greater incentives to work on the basis that fewer taxpayers face high marginal deduction rates. However, £2 billion of the £2.7 billion committed to that measure in the current financial year is not devoted to compensating losers from the removal of the starting rate of income tax, and as such was not substantially well-targeted.

The broader context

If the Government wishes to meet its fiscal rules, it will have to take them fully into account when proposing further changes to the personal taxation and welfare systems. The case for action to meet the Government's target to halve child poverty by 2010-11 is more pressing than ever given the further rise in child poverty by 100,000 children in 2006-07 to 2.9 million before housing costs. Pensioner poverty rose significantly in 2006-07, by 300,000 to 2.6 million before housing costs, reversing the welcome downward trend since 1997, and progress on fuel poverty is threatened by rising fuel prices. The advances made in tackling poverty among those out of work in the last decade has not been matched by comparable progress in tackling poverty among those in work.

Getting the process right

The Government must learn lessons relating to budgetary processes. We recommend that the Government publish a Household Impact Assessment alongside future Budgets and Pre-Budget Reports. This would analyse the impact on individual, family and household finances of Budget measures and other changes to the welfare system. We welcome the emphasis by the Government on the 2008 Pre-Budget Report, but the Government should not simply respond to a short-term political problem by turning the 2008 Pre-Budget Report into an early Budget. Instead, the Government must re-establish the consultative nature of the Pre-Budget Report. For personal tax decisions, the sudden and final nature of Budget decisions has been less about the need to prevent forestalling activity than it has been about the perceived benefit of seeming to pull rabbits from the hat. Recent experiences suggest that such short-term benefits are outweighed by the longer term benefits resulting from proper consultation.

The way forward

No reforms other than those to the tax system are likely to be effective if viewed principally as mechanisms for compensating the remaining 1.1 million households who lose from the removal of the starting rate of income tax even after the 13 May changes. There is a pressing need for the Government to seriously examine ways in which these remaining households can be compensated. For future years, the Government must ensure that the original 5.3 million losing households do not suffer losses from the abolition of the starting rate. The Government should set out proposals to achieve this by the time of the 2008 Pre-Budget Report. The announcement on the 13 May of the raising of personal allowances was a welcome step towards a simpler tax system with fewer low paid people paying income tax; further complications should now be resisted. Although the fiscal circumstances remain challenging, every effort should be made to avoid returning low-paid people into the income tax system.

In the longer-term, reforms should be centred on the greater challenges faced by the Government in combating poverty. We recommend the establishment of a Poverty Commission on a similar basis to the Pensions Commission to examine the public policy challenges relating to poverty.

Last Updated ( Tuesday, 07 October 2008 20:48 )