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23 March 2011

Osborne’s tax cuts will be swallowed up by his tax rises

The £600 rise in the personal allowance will be swallowed up by higher VAT.

By George Eaton

George Osborne’s plan to announce a £600 increase in the personal income-tax allowance from next April has garnered him a series of glowing pre-Budget headlines this morning.

The Daily Mail declares that the tax cut will benefit millions to the tune of £320. In reality, as Will Straw points out, it’s worth only £120. The misleading £320 figure comes from including the previously announced £1,000 rise in the tax threshold to £7,465 (worth £200 to basic-rate taxpayers).

What’s more, the entire tax cut will be swallowed up by the VAT rise, rampant inflation of 4.4 per cent and higher National Insurance. A report for the Centre for Retail Research, for instance, found that the Chancellor’s decision to raise VAT to a record high of 20 per cent would cost each household £425 a year on average.

It’s also far from clear how Osborne intends to fund this £2.34bn tax cut without slowing his deficit reduction programme. We’re told that, unlike the £1,000 rise in the personal allowance announced last June, this won’t be paid for by pushing more taxpayers into the 40p ban.

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Osborne has already decided to use £500m to reverse the planned 1p increase in fuel duty. And with the OBR certain to downgrade its growth forecasts (from 2.1 per cent to 1.8 per cent in 2011), he’ll have even less room for manoeuvre.