Britain to Lift Top Income Tax Rate to 45%

The British government cut the basic sales tax today to help boost consumer spending as the economy slides into recession, and proposed a higher rate of income tax for the biggest earners if it's re-elected. In his pre-budget report to lawmakers, the Treasury chief said the Value Added Tax (VAT) will be reduced to 15%, the lowest level allowed under EUl aws, from the current 17.5% until the end of 2009 in an attempt to kick-start the economy ahead of the crucial Christmas trading period. That move will save an average consumer around 200 pounds ($300) a year but cost the Treasury around 12.5 billion pounds ($18.5B) at a time when borrowing is already at sky-high levels. He said the 20 billion pound ($30 billion) package would include increases in tax credits to the least well-off and bring forward 3 billion pounds of capital spending from 2010 to now. He predicted the measures will make the recession "shallower and shorter" than would otherwise have been the case, though he expected the British economy to contract between 0.75% and 1.25% in 2009 after growing 0.75% this year. As well as trying to boost the economy quickly, he sought to provide a roadmap to getting public finances back into shape in the medium term. He said the budget will be back in balance by 2015-2016. He said a new 45% tax rate will be introduced in April 2011 for those earning more than 150,000 pounds ($225,000) a year, though that depends on whether the governing Labour Party is re-elected after the next election, which has to be held by June '10. The current top rate of tax is 40% and has not been changed since Margaret Thatcher's government slashed it from 60% in 1988. Though the new tax rate would raise only 2 billion pounds ($3 billion) a year, it is part of a package of measures from the government to reduce borrowing in the years ahead and assuage market fears that the public finances are out of control. He said the government will be striving for a further 5 billion pounds ($7.5 billion) worth of efficiency savings, consider a crackdown on tax havens such as the Isle of Man and the Channel Islands, and reduce the rate of growth of government spending to rein in borrowing which, he said, will hit a staggering 118 billion pounds in 2009/10, up from 78B in 2008-'09. Net debt will rise to 48% of GDP in 2009 from 41% this year. Though that level is way below other countries, such as the U.S., Japan and France, debt has been rising from around the 30% level just a few years ago. The Treasury chief said net debt will peak at 57% of GDP in 2013-2014. His plan is likely to have a profound effect on the political debate in Britain ahead of the next general election especially as the Labour government has been elected three times in a row since 1997 promising not to raise income tax rates. The opposition Conservative Party has warned that "the government's borrowing binge may not work and would cause a tax bombshell in the years ahead."