Don’t expect any favours from Darling

Damned if he does, damned if he doesn’t. That’s the dilemma facing Alistair Darling in next Wednesday’s Pre-Budget Report.

In an ideal world he would lay bare the true state of the nation’s finances and spell out measures to return them to acceptability within a reasonable time span. But there is never an ideal time for a politician to do that, especially when he is a senior member of an unpopular government facing a general election within the next six months.

So the word in Westminster is that he will be “neutral”, avoiding significant new tax rises or measures to curb public spending. The City believes that fundamental decisions about Britain’s huge debts and its soaring budget deficit will be postponed until after the election and that the international ratings agencies will reserve judgement until then. Equally, suspicions that Darling will come up with a “giveaway” package designed to bribe voters are dismissed as too risky in the circumstances.

But there will be tinkering designed to present Darling as a realist. He has already announced some measures that will come into effect in April; for instance, personal tax allowances will be frozen across the board. In addition, there are likely to be extra taxes levelled at higher-rate earners and capital gains tax could soar symbolically to hit the better off.

There will be no extension to the temporary VAT cut introduced at this stage last year; indeed, many fear that from January 1 it could rise beyond 17.5%, with a 20% rate predicted in many quarters despite the effect that would have on consumer spending and its consequences for the fragile recovery.

It would need Panglossian optimism, however, to expect Darling to offer any help for the drinks industry despite the well-documented woes – more than 50 pubs a week closing; beer sales in supermarkets and shops falling by 4.4% in the third quarter; and off-licence groups such as First Quench collapsing.

The Treasury has a long and undistinguished record of ignoring the law of diminishing returns on excise duties; indeed in last year’s Pre-Budget Report Darling pointedly added 8% to duties on wines and spirits to prevent prices being cut by the temporarily lower rate of VAT. In fact, because duties are based on volume, not value, the rise further distorted the market, according to the Wine & Spirit Trade Association – the effect was to increase the price of 90% of the wines sold in the UK.

The WSTA has pointed out to the Treasury the consequences of duty rises of 19% and 15% respectively on wines and spirits since March 2008 and has requested that excise duty rates now be cut to counter-balance the widely-expected rise in VAT.

Good on the WSTA for pressing the logical case, but given Darling’s previous “form”, such action would mark a very conspicuous about-turn. Don’t be surprised if he reacts illogically and imposes further excise duty rises, all in the interest of political expediency.

Finance on Friday, 04.12.2009