Up and out

Anything Ireland can do, Britain can clearly do, too.

That, at least, seems to be the message of last week's budget, announced in parliament by Alistair Darling, the Labour government's chancellor of the exchequer.

Three weeks ago, with an emergency budget, Ireland raised taxes for people earning more than €75,000 a year. This was an attempt to plug a budget deficit estimated at 10 per cent of gross domestic product (GDP).

Such a tax increase is a risky strategy in a year when the Irish economy is expected to contract by eight per cent. But the gaping hole in the public finances was seen as too big to ignore.

Britain has an even bigger problem with its public finances, as Alistair Darling admitted. The deficit for the fiscal year 2009-10 is now estimated to be £175 billion or 12.4 per cent of GDP. Just a year ago, the estimate was £38 billion.

The 2010-11 deficit is forecast to be just as huge. Prime minister Gordon Brown, who likes to present himself as a prudent Scot, must be furious about all that red ink. Yet the fault is mainly Brown's: while he was chancellor from 1997 to 2007, he failed to sort out Britain's public finances despite a booming economy.

From 2011-12, Darling expects the public deficit to fall significantly as a percentage of GDP. This is based on some heroic assumptions about Britain's growth — 3 per cent plus from 2011, after a fall of 3.5 per cent this year — and drastic cuts in government spending.

It's no coincidence that the spending cuts will come after June 2010, the latest month in which Gordon Brown can call a general election. Nor is it coincidence that Darling announced higher taxes for the rich in his budget: from April 2010, the top tax rate will rise from 40 per cent to 50 per cent for those earning £150,000 or more.

Brown and Darling clearly want to make traditional Labour voters feel good by hitting those with higher incomes. And they want to create a split among the opposition Conservatives between those who will argue for reducing taxes for the rich again, and those who will accept the political and fiscal necessity of the increase.

It's a clever move in many ways, but I doubt that it will work. After 12 years in power, the Labour government has lost most of its sheen. As The Economist wrote last week: "... by attempting to use the budget for political advantage ... the prime minister has done neither himself nor his country any favours. The public is losing patience with him, and so is this newspaper."

In Britain, taxes are going up and Gordon Brown is on his way out.