Think-tank warns on tax changes

Millions of households could be worse off unless the chancellor extends his one-off tax cut announced last month, according to new research.

The Institute for Fiscal Studies predicted on Wednesday that 18 million of the 22 million families who gained as a result of Alistair Darling's 'mini Budget' would lose about £150 a year by 2010/11 unless the changes were extended.

And it warned that, despite the compensation package, almost a million of the poorest families would still lose out this year as a result of the abolition of the 10p tax band.

Director Robert Chote said: "By announcing a big, one-off increase in the personal income tax allowance, Alastair Darling has not only created millions of winners this year, he has created millions of potential losers next year.

"On the evidence of its recent decisions, the government may well be afraid to take their gains away from them.

"If public sector borrowing ends up permanently higher as a result, it will further undermine the credibility of the government's management of the public finances and increase the probability of future tax increases or spending cuts, perhaps soon after the next general election."

Making the tax concessions permanent would cost £3.2bn a year, with £2.7bn spent on higher income tax allowances and £575m needed for winter fuel payments, the think-tank said.

It expected ministers to bow to "political pressures" and avoid unpopular tax rises ahead of a general election.

But it warned that increased borrowing could result in the government breaching its own fiscal rule of keeping national debt below 40 per cent.

Shadow chancellor George Osborne said the report highlighted "Gordon Brown's compensation con" on the 10p tax rate.

"His cynical manoeuvre to save his own political skin will leave 18 million people facing a tax rise next year. This is what happens when short term politics gets in the way of the long term interests of the country," he said.