Chancellor opts for pay now, pain later approach to boost UK economy

LONDON BRIEFING:FOR THE right-wing Daily Mail, it was a "fiscal atom bomb". On the left, the Daily Mirror portrayed the prime minister on its front page as a poker player, under the headline "The Gambler".

London mayor Boris Johnson, never short of a quotable quote, went further, accusing Gordon Brown of behaving like a drunk at the gambling table.

Other commentators chose to compare the PM and his chancellor Alistair Darling to Robin Hood, robbing from the rich in the form of the proposed new top rate of tax of 45 per cent, and redistributing to the poor, in the shape of a £20 billion (€23.75 billion) tax giveaway.

But the gambling analogy was by far the most popular - and by the time Darling sat down in the House of Commons on Monday, after delivering his pre-budget report, the sheer scale of the government's gamble, not just with the nation's economy but also with its own political future, had become clear.

Darling's 55-minute speech was billed as the government's most important financial statement since Labour came to power in 1997. And it lived up to that billing. This was a make-or-break fiscal package; a defining moment that will determine the political and economic landscape for years to come.

The proposed new top rate tax - which voters will be given a chance to back or reject at the next election - marks the death of New Labour for many political commentators. And, for the first time, it opens up the ideological gap between Labour and the Tory opposition.

MPs greeted Darling's admission that borrowing will spiral to an astonishing £118 billion - by far Britain's biggest ever peacetime debt mountain - with howls of derision. There were catcalls, too, for what were regarded as Darling's over-optimistic assumptions of a return to growth and financial stability in 18 months' time.

The centrepiece of the government's £20 billion fiscal stimulus package is a temporary reduction in the rate of value added tax, from 17.5 per cent to 15 per cent, at a cost of around £12.5 billion.

This will bring a broad-based boost to consumer spending - or so the theory goes.

But the government itself admitted yesterday, deep in the detail of the pre-budget report documents, that it was unclear how much of this £12.5 billion would flow back into the economy.

Retailers are not obliged to pass on the reduction, and many will prefer instead to rebuild their profit margins.

Consumers were distinctly underwhelmed. After all, when retailers such as Marks Spencer are staging desperate pre-Christmas "guerrilla sales", offering discounts of 25 per cent, a mere 2.5 per cent cut looks pretty pathetic by comparison.

And many of those shoppers the government is trying to tempt to start spending again will find themselves worse off after the emergency measures take effect.

Middle-class voters were hit with a surprise half-percentage point increase in national insurance contributions, which will leave them out of pocket from 2011.

Darling attempted to balance the giveaway with a show of fiscal responsibility, detailing a series of spending cuts and tax rises. The headline-grabber was the return to Labour's traditional top-rate tax policy, with 500,000 or so people who earn £150,000 or above in line for a new 45 per cent rate.

Before those tax rises kick in, Brown will be hoping to have secured another election victory. There has been some talk of a snap poll, but most political commentators believe Monday's pre-budget report was effectively the starting gun on a campaign that will see an election in 2010, or possibly next year.

Darling's high-risk rescue package also saw giveaways for low-income families and businesses, as well as the promise of a kick-start for the moribund mortgage market.

But, again, buried deep in the detail of the pre-budget report papers, was a warning that new mortgage lending next year is expected to grind to a complete halt, further lessening the chance of any early recovery from recession or a return to consumer confidence.

So, does Darling's audacious plan to spend his way out of recession have any realistic chance of success? Not according to the opposition - not surprisingly, shadow chancellor George Osborne was scathing of the government's gamble with the nation's finances.

Any claim to have abolished boom and bust was now revealed as a deceit: "In the end," he said, "all Labour chancellors run out of money."

That is not quite true yet, but is a distinct possibility.

Whether or not the great giveaway works, there can be no doubt that, for all of us, there will be a heavy price to pay in the years ahead for the government's new "pay now, pain later" economic policy.

Fiona Walsh writes for the Guardiannewspaper in London