Brown Takes U.K. ‘Back to the 70s’ With Tax, Debt Proposals

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.

“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.”

Bull Markets

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

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 worsening budget outlook prompted a slide in U.K. government bonds. Ten-year gilts yesterday snapped four days of gains and the cost of hedging against losses on government bonds climbed to an all-time high. Credit-default swaps on gilts rose as much as 4 basis points to 87.5, before falling back to 86, according to CMA Datavision prices.

VAT Cut

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. 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. Today’s stimulus equals 1.1 percent of the economy’s value.

To help pay for the plan, Brown will 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.”

Yet the first recession since 1991 will sap tax receipts and drive the 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.