The Government's decision on 13 May 2008 to increase the personal income tax allowance by £600 and to reduce the effective upper rate threshold by the same amount for 2008-09 is estimated to cost £2.7 billion (just under 0.2% of national income). The Chancellor, Alistair Darling, told the House of Commons: "I am able to finance this proposal through borrowing this year, ensuring that we do not take money out of the economy at this time."
The Government maintains that the tax cut:
- is affordable within the constraints laid down by its fiscal rules; and
- will provide a useful stimulus to the economy at a time when economic growth is slowing.
This note briefly assesses these claims.