Darling gambles to lift UK out of decline

ANALYSIS:The UK chancellor's spend now and pay later move is a risky policy initiative, writes Philip McDonagh

HALF A trillion euro of borrowings, VAT slashed by 2.5 per cent and a €25 billion injection of public finances to lift the UK out of recession, boost business confidence and entice consumers back into the shops.

Forget about the small print, that was the top line of British chancellor Alistair Darling's pre-budget report, extensively leaked in yesterday morning's media and delivered by the chancellor a few hours later.

The man who inherited Gordon Brown's prudent fiscal mantle was under massive pressure to do something, anything in fact, that would jump-start the economy; and, by extension, save the British Labour Party from a humiliating defeat in the next election.

But in seeming contrast to his Irish counterpart Brian Lenihan, Darling cut taxes, accelerated capital spending and pledged a €25 billion injection of capital spending to support business, protect jobs and help homeowners.

Granted, he hiked the top rate of tax to 45 per cent, and pushed up national insurance contributions by 0.5 per cent from 2011, but his report was a gamble to deliver economic recovery by the autumn of 2009. If he's correct, he will be hailed as a hero. But if he's wrong, the consequences for the British economy will be dire.

Already some commentators have tried to make direct comparison between the two announcements.

They are so seemingly opposed, claimed one political observer on RTÉ, that only one could be right - so which finance minister got it wrong? Actually, probably neither.

When the going got tough and the global financial chickens came home to roost, the two economies faced different challenges.

Ireland is already in recession and preparing - or at least hoping - for recovery, while the UK is still trying to figure out how much worse things can get.

Darling announced that he would delay a rise in UK corporation tax from 21p to 22p in the pound for small businesses. While that was welcome, particularly at a time when these businesses are under extreme pressure, the Irish 12.5 per cent corporation tax rate remains the object of considerable envy, particularly in the North and other UK regions.

The UK's level of VAT is now 15 per cent - the lowest rate allowed in the EU - and contrasts with Lenihan's raising the Irish standard rate to 21.5 per cent. But the rationale behind both seemingly opposing actions is probably appropriate for the differing needs of the respective regions.

Lenihan's income tax levy of 1 and 2 per cent, depending on income, doesn't seem so draconian when compared with Darling's changes to income tax and national insurance.

From April 2011, most UK middle and high earners will look longingly at Lenihan's gentle increase. Anyone in the UK earning €32,000 per year will pay an extra €800 a year as a result of the changes, with those on €112,000 now paying in excess of €2,400 per year.

If Lenihan had tried more than one of these measures it would have seriously reduced the competitiveness of Ireland to mobile business people.

From the North's perspective, yesterday was as good as it was likely to get; for the shopkeepers of Newry, Derry and Belfast, it puts the smile back on their faces.

The price differentials were already an attraction and if they actually pass the VAT cut on to the southern shoppers, they will be even happier.

But in Northern Ireland, the main beneficiaries are the lowest-paid households, where the VAT element alone should be worth more than £270 per family over the next 12 months.

In addition, state pension, child benefit and pensioner credits have been increased, with the child benefit increase brought forward from April to January 2009.

Overall, there are measures that will be welcome in tackling deprivation and helping Northern Ireland's lowest-income families.

However, Darling's proposal to offer credit to small businesses via a temporary finance scheme to help ease cash flow constraints is welcome, but this, as with other measures, depends upon the banks supporting the chancellor.

As with his VAT cut, a number of these measures will only succeed if financial and lending institutions are sympathetic to business needs.

But the bottom line is that this is a spend-now report and the state of the public finances suggests that UK taxpayers will also have to pay later. At least in that regard, Irish taxpayers are paying now and won't face bigger bills in a couple of years' time.

• Philip McDonagh is chief economist for PriceWaterhouseCoopers in Northern Ireland