This piece first appeared in The Daily Telegraph on 24 June 2000
The text here may not be identical to the published text

Inflation's what you make it

Brown magic

People all over Britain are now feeling the effect of the Chancellor’s Budget inflation cheat, first reported in Money Go Round on 1 April. He used a high rate of inflation when setting the amount to put UP taxes on petrol, beer, and car duty. But a very low rate to CUT taxes through higher tax allowances – the same 1.1pc rate he used for the ‘insulting’ 75p a week added to 10 million retirement pensions in the first week of April

Last week a Sunday newspaper led its front page with the 'revelation' - although it was more than two months too late to make that claim - and tablids and television lagged ever further behind..

But the Chancellor's sleight of hand was pretty tricky - it's no wonder it has taken some time to unravel. His magic trick went like this. With his left hand, he put up tax allowances and reliefs in line with the rate of inflation in September 1999. He did that using statutory rules which link the rise in tax allowances to the actual inflation rate seven months before the Budget. Unfortunately for taxpayers, last September the rate of inflation was at its lowest since May 1960 - 1.1%. He called this "the normal indexation of tax allowances and thresholds". That was also the rate used to put up the state pension paid from the first week in April, leading to what many pensioners have called the ‘insulting’ rise of just 75p a week in the basic retirement pension.

While the left hand was busy giving out these tiny tax cuts and pension rises, Gordon Brown’s right-hand was busy sneaking much bigger increases in tax on alcohol and driving. For those rises he asked the Treasury to forecast what the rate of inflation would be a year later, in September 2000. It came up with a figure of 3.4 pc – three times the rate he used to cut taxes and put up pensions. For this rise he used the phrase "the automatic inflation rise". Nowhere in his speech nor in the reams of Budget papers published with it, is the actual rate of 3.4% revealed. Accountants Chantry Vellacott have calculated that by using these two different rates the Chancellor has boosted the Treasury’s income by £750 million in 2000/01. And most of this extra money comes from people of very modest means.

The Chancellor’s trick certainly dealt a double whammy to Margaret Richardson. A widow since the 1970s, she worked as a school secretary and cared for her daughter Maureen, a paraplegic since she had a stroke 21 years ago. Margaret’s main source of income is her state pension of under £70 a week, supplemented by a pension from her job of less than £50 a week. Despite the modest total – not much above £6000 a year – the Chancellor takes £20 a month off her in income tax. Because of her daughter’s illness Margaret has to have a car and the rising cost of petrol has dealt her a heavy blow.

"Petrol is one of my biggest expenses now. You have to put in £20 worth to go anywhere. The car isn’t just for pleasure I have to have it for Maureen. She goes once a week to the stroke association and to an art class. She has made a marvelous recovery, she writes herself now and once a week and she goes into school to help the kids with their reading. We have to have a car for all those trips. The cost means we just don’t go out as much. My sons live in Worcester and one in Cumbria and we visit them. We used to go to Southport and North Wales. But we can’t afford to do any of that as much now."

A lower rate of inflation on the tax on petrol would have been some help to Margaret and her daughter. But the biggest help would have been to use the higher rate of inflation to raise tax allowances and her pension. Because she gets a local authority pension from her time as a school secretary that is also raised in line with the same index as the state pension – just 1.1pc up this year. If the tax thresholds and allowances had been increased using the 3.4% forecast used to put up taxes, she would be better off by £33.40 over the year. And if both her pensions had been raised by 3.4% instead of 1.1% she would have been £140 a year better off. That would have made a big difference.

"I feel aggrieved that I pay tax at all. Why not a reduction if you are caring for somebody? You are saving the state a lot of money because someone would have to look after Maureen. Even £30 a year less would help with a tank of petrol once a year! I certainly do think they should give people like us more money. I always shop around going to the cheaper shops for lots of things, the German shops we call them, Aldi and Lidl. You don’t get as much choice though it is cheaper. But 1% inflation? I don’t believe it. It takes account of things we don’t buy, things we can’t buy that might be cheaper, but not my food bill. You notice every penny. There’s also insurance and of course council tax – we pay les because of Maureen but it is still £369 a year."

The only actual rate of inflation the Chancellor mentioned in his Budget speech was different again from both 1.1pc and 3.4pc. He told MPs "Today inflation is 2.2 per cent." That rate was the rise in prices excluding mortgage interest payments for February 2000. A rate that none of his measures used – either to cut taxes or raise them.

24 June 2000

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