Brown Takes U.K. ‘Back to the 70s’ With Debt Plans

By Gonzalo Vina

Nov. 25 (Bloomberg) -- Prime Minister Gordon Brown swept aside three decades of economic orthodoxy with tax increases on the rich and plans that will double Britain’s national debt.

Brown’s proposals yesterday to mitigate fallout from the global economic slump would cost 25.6 billion pounds ($38.7 billion) in the U.K.’s biggest round of stimulus since 1988.

The plan, which will result in the largest budget deficit among the Group of Seven industrialized nations, represents a retreat from policies that have shaped the British economy since Conservative Margaret Thatcher’s 12-year tenure that began in 1979. Brown’s predecessor Tony Blair called himself a proponent of “New Labour” and advocated policies Thatcher had promoted, including spending restraint, low debt and tax cuts for the rich.

“It is back to the 70s,” said Bill Jones, a political scientist at the University of Manchester. “It’s a return to the two-party divide and a temporary end to consensus politics. It’s like Labour has suddenly burst out of its straitjacket.”

Labour’s traditional union supporters backed the proposal by Brown, 57, to impose a new 45 percent tax on those earning more than 150,000 pounds a year, while opposition Conservatives accused him of irresponsibility for running up debt that will exceed 1 trillion pounds by 2014.

‘Warm-Up Exercise’

“This is a welcome warm-up exercise after 30 years of inaction and neo-liberal economics,” said Derek Simpson, joint general secretary of Britain’s largest trade union, Unite, which represents 2 million workers. “Gordon Brown has thrown off the shackles of New Labour to reveal the real Labour.”

For a decade under Blair, Labour pledged not to raise income tax rates to reassure voters that it had abandoned its traditional dogmas and supported people making money.

When Labour was previously in power, in the late 1970s under James Callaghan, the top rate of tax was 83 percent on earned income and 98 percent on unearned income. These rates were cut to 60 percent and 75 percent when Thatcher took office.

Britain isn’t alone in the shift from Thatcher-style policies that helped underpin a two-decade bull run in global stocks.

Obama’s Plans

U.S. President-elect Barack Obama, 47, said he aims to create 2.5 million new U.S. jobs in a two-year plan that Democratic lawmakers including Senator Charles Schumer of New York said may be as big as $700 billion. German Chancellor Angela Merkel and French President Nicolas Sarkozy said today in Paris they’re considering further steps for a European Union stimulus package.

The biggest measure announced yesterday by Chancellor of the Exchequer Alistair Darling, 54, was a 12.5 billion-pound cut in the value-added tax, to spur consumers. The sales duty will fall to 15 percent from 17.5 percent for 13 months. Brown will also offer help to workers on low incomes by making a previous tax cut permanent and increased aid to pensioners and people with children.

Brown’s stimulus, which lawmakers will consider in the first half of 2009, is the largest since 1988, when Thatcher’s finance minister, Nigel Lawson, provided a boost equivalent to 1.2 percent of gross domestic product. The so-called “Lawson Boom” that followed ended in a housing bust in the early 1990s.

Yesterday’s package, equal to 1.1 percent of the economy’s value, will add to a budget deficit that the Treasury expects to spiral as the slump in property prices and financial markets reduces tax revenue and spending on jobless benefits climbs.

Budget Deficit

At an estimated 8 percent of gross domestic product in the next fiscal year, the deficit will exceed the 7.7 percent reached in the aftermath of the early 1990s recession and a figure of 7 percent in the mid-1970s after the 1973 Middle East oil crisis led to two years of economic contraction.

To help pay for the plan, Brown will cut the pace of spending growth and raise the income tax rate on people making more than 150,000 pounds from the current top rate of 40 percent in the fiscal year starting in April 2011. That’s been the highest rate since 1988.

Under the new system, a person earning 200,000 pounds a year will pay 5,795 pounds more in taxes; at 150,000 pounds, the bill would rise by 3,040 pounds, while a person earning 100,000 pounds will pay 375 pounds more a year.

‘Big Headlines’

“It’s clearly something which they’re hoping to get big headlines on, and it will play well with the more traditional elements of the Labour Party,” said Peter Dixon, an economist at Commerzbank AG in London. “It’s the sort of thing which to a redistributive chancellor sounds good: that we’re going to soak the rich and those bankers that got us in this mess now.”

While Darling says his stimulus plan will limit the severity of the recession, some economists say his forecasts for the economy are too optimistic, meaning the public finances may deteriorate more rapidly.

Darling reiterated in interviews today that the economy will shrink no more than 1.25 percent next year and as little as 0.75 percent, and expand as much as 2 percent in 2010. The International Monetary Fund and the Bank of England forecast a 1.3 percent contraction in 2009, the most since the last recession in 1991.

The slump will sap tax receipts and drive debt to a record high. Net debt will climb to 1.1 trillion pounds, or 57 percent of GDP, in the fiscal year through March 2014 from 526 billion pounds in the fiscal year that ended in March.

That gave the Conservatives a target for their criticism.

“In the end, all Labour Chancellors run out of money,” said George Osborne, 37, the Conservative spokesman on economic policy.

To contact the reporters on this story: Gonzalo Vina in London at gvina@bloomberg.net.