10p tax hike needed to rescue British economy as MPs attack Darling’s ‘optimistic’ forecast
 Prayers: Gordon Brown should be worried with GDP slumping by more than 4.6 per cent, says national economic think-tank |
Huge tax rises may be needed to rescue the British economy as it heads towards a bigger annual crash than in the depths of the Great Depression, a respected forecasting group warns today.
The plunge in national output would require the Treasury to raise an extra £42billion – the equivalent of a 9-10p in the pound rise in the basic income tax rate.
Alternatively, workers could be required to work until they are 70.
Gross domestic product could slump by more than 4.6 per cent this year, exceeding the decline recorded in 1931 when Labour’s Ramsay Mac-Donald was prime minister, according to the National Institute of Economic and Social Research.
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Such a catastrophic fall would further erode government revenues and drive unemployment through the three million mark.
The analysis will deepen the political crisis in Number 10 and add to the pressure on Gordon Brown.
It also comes Chancellor Alistair Darling’s Budget forecast of a swift return to strong growth in the UK economy was branded “optimistic” by an influential parliamentary committee today.
In its report on the April 22 Budget, the cross-party House of Commons Treasury Committee said that the forecasts for public borrowing and national debt set out by the Chancellor represented “the worst fiscal outlook since the Second World War”.
And it warned that Mr Darling’s prediction for the UK economy to return to growth of 1.25% in 2010 and 3.5% in 2011 was based on assumptions about a sharp recovery in consumption which may prove excessively optimistic.
The report also warned that there were “considerable uncertainties” about the amount of additional revenue that could be raised by Mr Darling’s introduction of a new 50p top rate of income tax on high earners.
And the MPs said they were “not convinced” that measures introduced to stimulate the housing market would have “any marked effect”.
The committee also said it was “alarming” that Mr Darling had failed to include substantial measures to tackle child poverty in his Budget or last autumn’s Pre-Budget Report.
On current trends, the Government will miss its target to halve child poverty by 2010/11 by a “significant margin” and Mr Darling’s statements have done little to redress the situation, the report said.
Not convinced: An influential parliamentary committee today said Alistair Darling’s Budget forecast of a swift return to strong growth was ‘optimistic’
Backing the parliamentary forecast, the institute, which does research for Whitehall departments, also labelled Mr Darling’s claims that output will fall 3.5 per cent this year as ‘optimistic.’
It forecast a GDP contraction of 4.3 per cent in 2009, but warned there is a ‘real risk’ the declines could be worse. They could exceed the previous 4.6 per cent record for an annual slide, which was set in 1931.
The numbers strip out the effects of the Second World War when the shift from a wartime to peacetime economy distorted the figures.
The plunge in economic output will push house prices down by 16 per cent this year, leading to a 30 per cent peakto-trough slump, the institute predicted.
This will hammer household wealth and spending. Between the end of 2007 and the end of this year families will lose £1.3trillion of their wealth because of property and stock market falls, the institute estimates.
The institute’s director, Martin Weale, said: ‘Output so far has fallen slightly more than it did during the 1930s Depression. Winning a race with Ramsay MacDonald is a thought that would worry me if I were Gordon Brown.’
The bleak economic outlook will put the government finances under mounting pressure.
The institute said future governments will face national debt levels exceeding 100 per cent of national output, or more than £1.4 trillion.
This is partly because gains in economic activity and tax revenues during the banking boom were ‘illusory’, leading to unsustainable public spending.
The institute calculates basic rate tax increases of 9p-10p in the pound are needed to return the government finances to balance by 2023.
And even this may not be enough to repair the public finances, the report says.
The Prime Minister used to insist that the national debt should go no higher than 40 per cent of GDP.
To pull Treasury debts back to this level would require an additional 15p in the pound of increases in the basic rate of tax – on top of the 9p-10p the institute has pencilled in.
Such an extraordinary hike would take the basic rate, currently 20p in the pound, to an eyewatering 45p in the pound, amounting to tax rises of £120billion a year.
Such a move would clearly be political suicide, the research body acknowledged.
So one alternative could be government spending cuts of between £50 and £60billion a year starting early in the next decade.
By Sam Fleming
Last updated at 12:33 PM on 06th May 2009
Source: Daily Mail