Dr Darling leaves sick patient guessing

It’s rather like waiting for surgery. The diagnosis has been made and you know that when you wake up the outcome will be uncomfortable, probably painful, but in the long run you hope for a significant improvement.

In this case the patient is British economy. Nice Dr Darling used his soothing monotone to gloss over the severity of the problem, but he failed to explain the procedure in detail. The patient was left to guess at what he plans to do and the probable outcome.

None of the significant Pre-Budget Report measures are scheduled to come into effect before April, except the return of VAT to 17.5% on 1 January. So while at the margin some tax rates and allowances will be altered on 6 April, most of Darling’s plans are on hold until after the general election. That now looks most likely to take place in mid May – after pensions and benefit rates increase. Whichever party (or coalition) gains power will have to introduce a real Budget (as opposed to Wednesday’s holding exercise) to combat Britain’s ills.

So why has only one sector of the economy – drinks producers and retailers – been made to suffer immediately? Last year when he cut VAT for a year to 15%, Darling introduced countervailing increases in excise duties, the real effect of which was to raise the price of about 90% of the wines sold in the UK.

By declining to remove those duty increases now that VAT is reverting to 17.5%, he has imposed a stealth tax on the sector on top of the duty rises in last spring’s Budget. As the Wine and Spirits Trade Association points out, in the past two years the drinks industry has had to contend with duty increases of about 20% for wine and 16% for spirits. To that must be added the return to VAT at 17.5%, which will add a minimum of about 6p to a pint of beer.

Nor is that the end. All employers will have to pay extra National Insurance from 5 April and it beggars belief that any new government will reverse those increases after they have taken effect. Most of Darling’s reliefs for small enterprises apply to business taxes. To take advantage of them you have to make a profit. If you are in the red or on the borderline, they are of no avail.

What is more, if Labour wins the election, Darling has promised to continue to increase alcohol duties by two percentage points above inflation (which will by running at about 3% in the spring). That could be a further 5% on rates. Meanwhile buried in the small print of Wednesday’s announcements was the intention to revise the duty regime on cider (Translation: increase the rate on cider). So much for his claim his measures were based on "fairness".

Nor is anybody betting that an incoming Conservative chancellor will cut excise duties at a time when swingeing public spending cuts will be on the agenda and he will need every penny he can grab to help cut Britain’s debt.

Everyone knows that both businesses and consumers are going to feel a very tight pinch over the next few years. A new chancellor accepting the status quo seems the very best the industry can hope for.

Finance on Friday, 11.12.2009