Darling to increase NI to fund £20bn spending binge

There was a sting in the tail of Monday's Pre-Budget Report: a 0.5% increase in NI (after the election)...

Last Updated: 09 Nov 2010

Since almost every aspect of the Government’s fiscal stimulus package has been extensively trailed in the media in the last few days, the only real question was how Alistair Darling planned to pay for this unprecedented spending spree. And on Monday afternoon the Chancellor revealed that one way will be a 0.5% hike in the rate of National Insurance, for both employers and employees. This will only be introduced in 2011 – which just happens to be the year after the election is likely to take place...

The centrepiece of the Government’s stimulus package will be a temporary 2.5% cut in VAT (who’d have guessed it), which will drop to 15% for 13 months from December. The Treasury has also brought forward various public spending programmes, made permanent the temporary tax cuts it offered to those affected by the 10p tax rate fiasco, and produced a £1.8bn support package for the housing industry. All in all, this will supposedly boost the economy by £20bn in the next 18 months – equivalent to about 1% of GDP.

In the short term, this means the government will have to max out its credit card even further: borrowing will more than double to £78bn this year, and then shoot up again to £118bn in 2010. In fact, by 2013/14, the national debt will be almost 60% of GDP – and according to Tory sums, it's likely to top £1trn before it starts to fall again (which won’t be until 2016). This staggering sum, which dwarfs any previous government borrowing, could get even higher if the Government fails to find £5bn of cost savings (more than likely), and if the economy isn't growing by 1.5%-2% in 2010, as the Treasury optimistically predicts (also more than likely).

Darling admitted it would be 2016 at the earliest before the Treasury could balance the books again – and it will mean higher taxes. The Government has been all too keen to trumpet the 5% hike in the income tax rate for those earning more than £150,000 (in fact, these high earners are getting clobbered twice, because they’ll also see their personal allowance disappear). However, it’s been a bit more reticent about its plan to increase NI, which will hit businesses and employees alike from 2011. There’ll also be increases in alcohol, tobacco and petrol duty – so even if the VAT cut does put more money in people’s pockets (which many consider debatable), they’ll have to give it straight back to the government when they fill their car...

There was some good news for business. Tax relief on empty properties has been extended, losses can now be offset against the last three years of profits for tax purposes, and HMRC will allow companies to spread their payments over a longer period. Most surprisingly, the Government is setting up a £1bn Small Business Finance Scheme to funnel cash to SMEs, while there’ll also be a new lending panel to make sure the banks play ball (not least because there’s £4bn of European Investment Bank money on the way). But we suspect this forthcoming NI tax hike might diminish any feel-good effect...

In today's bulletin:

Isn't that rather reckless, Darling?
Mortgage worries mount as lending slumps again
Rio Tinto tanks as BHP Billiton scraps mega-bid
JD Sports pounces on ailing rival JJB Sports
Darling to increase NI to fund £20bn spending binge

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