Newswatch – Monitary committee to ignore tax burden

The raft of tax changes announced in last month’s Budget will hold little sway over the members of the Bank of England’s monetary policy committee as they prepare to announce their decision on interest rate changes next week.

According to economists from investment banks and the Big Five, chancellor Gordon Brown ‘ignored’ around #3.7bn worth of tax increases announced in previous Budgets when he said the tax burden would be cut in March.

Brown also failed to mention tax increases already in the pipeline for future years that will make the net effect of the Budget package on the economy neutral or even slightly contractionary.

Examples of tax changes this year already signalled by the chancellor but ignored in his net definition of a tax cut, include the #1.6bn previously announced on tobacco. He also excluded changes in ACT, the scrapping of MIRAS and the phasing out of the tax credit on pensions.

Because these increases have been balanced by a rise in public spending, the overall picture is fairly neutral and will have had little influence on the members of the MPC, according to analysts who expect interest rates to fall over the next six months.

KPMG economic analyst Andrew Smith said: ‘If the Bank of England took the chancellor at his word when he said he was cutting taxes, it would be less inclined to boost the economy itself with lower interest rates.’

HSBC UK economist Jonathan Loynes said many of the changes introduced in the recent Budget would fall outside the two-year forecasting period operated by the Bank of England.

He predicted that rates would begin to rise again next year when the foreshadowed tax announcements take effect.

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