Politics -
Euro
Britain
would face a series of tax bombshells if it joins
the euro under plans drafted by Gordon Brown to
control the direction of the economy. The
Chancellor aims to compensate for losing the
ability to change UK interest rates to boost or
cool down the economy by making greater use of
powers over taxes, including VAT and stamp duty.
Brown would use regular "mini-budgets"
to maintain his control over the economy and
smooth the peaks and troughs of economic
activity. The Tories seized on the warnings that
the cost of living and house prices could rocket
under the euro as proof that entering the single
currency would "put at risk people’s
mortgages and jobs".
If Tony Blair finally succeeds in marching
Britain into the single currency, he would
automatically cede control of interest rates -
one of the most important economic levers under
his command - to the European Central Bank (ECB).
Using tax policy, particularly VAT and stamp
duty, would be the Chancellor’s most likely
alternative strategy for maintaining control over
the economy. But in the first estimates of the
likely impact of using taxes to manage the
economy, leading economists have warned that he
would need to impose massive increases in VAT and
stamp duty to have the same effect as a
relatively small change in UK interest rates has
today.
Under the euro, an £11bn-a-year tax hike would
be needed for fiscal policy to have the same
effect as a 1% increase in interest rates by the
Bank of England, according to early estimates by
HSBC. This would be the equivalent of hiking VAT
by 2.8 percentage points - up to 20.3%, from
17.5% today. John Butler, UK economist at HSBC,
said, "Very important and frequent swings in
tax rates would be required. Budgets would become
very important again. You would not be able to
change taxes only once a year; rather we would be
talking about varying tax rates potentially as
frequently as every couple of months."
The Treasury believes that its little-known
discretionary "regulator" powers, which
already allow the government to vary VAT rates by
anywhere between 13.1% and 21.9% - the equivalent
of £15.9bn - without asking parliament, would be
insufficient to cope with all eventualities.
These limits could potentially constrain the
ability of the existing regulators to offset
large shocks by themselves. A wider degree of
permitted variation may therefore be desirable,
the Treasury argues in one of the 18 background
studies on euro entry released last week,
implying that the tax changes could reach well
over £20bn if the economy grows too quickly or
too slowly.
Michael Saunders, chief European economist at
Citigroup, said, "The Treasury is proposing
a return to a 1960s or 1970s world of
mini-budgets, with tax changes used if capacity
use deviates significantly from average. Such
frequent tax changes could be economically
damaging if they distort price signals. They
would be politically difficult, requiring the
government to punish rapid growth with tax hikes.
It is also unclear how such a framework could
comply with the EU stability and growth pact
which limits the use of fiscal policy and budget
deficits."
Analysts were also questioning the suggestion in
Treasury documents that stamp duty could be
varied to dampen fluctuations in the housing
market and manage overall demand in the economy.
Sabina Kalyan, a housing economist at Capital
Economics, said, "The kinds of stamp duty
rises you would need would be so huge that it
would be political suicide and hence not
tenable." With house prices still growing by
15% to 20% a year, even a 10% hike in stamp duty
would still leave gains of between 4% and 9% for
cheaper houses currently paying a 1% levy,
analysts said.
Michael Howard, the shadow chancellor, said,
"Joining the euro would put at risk
people’s mortgages and jobs. These new euro
taxes threaten to cost thousands of pounds."
Brown said that while he backed euro membership
in principle, he did not believe that the UK was
ready to enter the single currency. He said the
government would report back on progress towards
meeting the tests in the budget next year - and
then decide whether to assess his five tests for
euro membership again. He said a bill would be
unveiled this autumn to pave the way for a
possible referendum next year.
Income tax would have to rise by 5p in the pound
if Britain decided to join the euro, it has
emerged. The startling conclusion, the equivalent
of a £16bn tax rise, is part of the Treasury's
economic model on the conditions necessary to
ease the transition into the single currency if
and when it happens. The figure was found
'buried' in the technical studies published as
part of Gordon Brown's assessment of euro
membership. Such a painful rise in income tax
would be required to prevent spiralling inflation
and an unsustainable economic boom.
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