It would have been a bombshell for many, but in good old British tradition details of this annoucement were leaked this weekend, so here we are picking this apart before Alistair Darling has made his speech due later on today.

The jist of it: Labour want to spend their way out of this unprecedented recession. And we are all seriously concerned that the numbers behind the justification of the intention to spend our way out of the recession just does not seem to add up.

Gordon Brown has said that “Extraordinary times require extraordinary action”. Really what the Labour should try to prevent is an extraordinarily bad decision in these testing times.

Give me money: It’s all about giving the population extra spending power – and crucially, getting them to spend it all immediately – at the time when everyone wants to hold on to their hard-earned cash as hard as possible.

Labour suggest slashing the standard rate of VAT, currently at 17.5%, to reduce the price of many consumer goods and entice us to go on a shopping spree. But what we are hearing is that for a typical consumer, the net benefit of this will be in the region of £145 per year – hardly a mind-blowing sum. This really won’t make enough of a difference.

Guess who pays? The proposed VAT tax cut of 2.5% will cause a loss of budget revenue of about £12bn. Only 10% of this – £1.2bn – will be recouped through introducing a 45% income tax band against those earning over £150,000. This leaves a shortfall of just under £11bn. Who is going to pay for that?

Well, no points for guessing. We all will! As the result of Labour spending policies, the UK government debt is now approaching £100bn (that’s 8% of UK’s GDP), and this little gem of an under-financed VAT tax cut is making a weighty contribution to this figure. 

This debt is going to burden the nation for years to come, causing – in due course, and probably quite soon – an increase in the tax burden for the nation. And because many are aware of this, they are unlikely to go out and blow the £145 the government just generously gave them.

I am not saying I have the answers. But it would be good to see a strategy that makes sound financial sense. This one just does not seem to; worse still, it stores up problems for years to come.  

So Mr Brown, the saviour of the world’s financial system, really needs to numbers straight and convince us he can make this work.


Copyright 2008 by CuriouslyInspired