Tuesday, 6 January 2009

Will the Tory tax plans have appeal??

. Just in case people are in doubt this is the one with text unlike the one Blogger kindly published without. The first thing of note to my mind is that we would be wrong to underestimate their appeal to a certain constituency. I have seen numerous 'Cost of living' surveys expressing concern about the issues facing savers and abolishing tax on savings for basic rate payers will appeal to those voters who express those concerns.

Demographically, they are likely to appeal to what is a core Conservative constituency; ie, older voters who actually have savings to worry about and who may or may not be dependant on those savings. However, the obvious problem is that there is no guarantee that this money will be spent; furthermore, low interest rates which are going to exist until the cash starts flowing round the system again, are likely to offset any 'gains' that people make. Let's look at the figures the Tories are claiming. The party estimates someone earning £800 a year from savings would be £160 a year better off. However, if this was placed in an account with a 3% interest rate they would have to have already saved around £26,000.

In cutting it for basic rate payers, ie, those on the low incomes they are actually targeted at the people least likely to be able to save and who have not been saving up until now. Another fatal flaw exists; lowest income brackets are obviously those most likely to be adversely affected by cuts in public spending (which admittedly could in turn lead to them spending more and saving less). However, the spend will be on areas of provision where the state used to provide so in terms of stimulating growth again we are left with a minimal impact. Similarly, raising the savings allowance for pensioners sounds good but if it is offset by a cut in the state pension are in effect robbing Peter to pay Paul.

In short, these measures have all the appearance of being amazingly muddled and are to a large extent counter intuitive to economic thinking. Politically, they seem to make some sense to me however, the question has to be asked what they actually bring to supporting people outside a key Conservative demographic.

Even the Daily Telegraph points out;

"Faced with a mountain of debt and the prospect of deflation, government policies should be aimed at either encouraging people to go out and spend or to pay back debt – and preferably both."

To my mind David Cameron's proposals are unlikely to help with either; as is pointed out logically speaking they lack all sense of timing. It is yet another example of how they are struggling to get to grips with the changed agenda following the economic crash. Encouraging saving may have made sense some years ago when levels of credit were still running high and could have cut against a debt culture but the reality is that the horse has already bolted.

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