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Gordon Brown is facing a £1 billion annual bill for the 1.1 million people who have yet to be compensated for the 10p tax fiasco.
The scale of liabilities piling up for the Government emerges today with a devastating critique of Mr Brown’s personal handling of the issue that has hobbled his Government.
As Chancellor, Mr Brown acted for the “perceived benefit of seeming to pull rabbits from the hat” when he cut 2p off the basic rate of income tax and paid for it by abolishing the 10p rate.
The criticism, from the Labour-dominated Treasury Select Committee, made deeply uncomfortable reading for Mr Brown the day after his first anniversary as Prime Minister and Labour’s humiliating fall to fifth place, behind the BNP, in the Henley by-election.
Mr Brown’s embarrassment was compounded when Lord Levy, Tony Blair’s chief fundraiser, said that Labour should “seriously consider” ditching the Prime Minister.
The committee report spelled out how new costs were rising fast for Alistair Darling, the Chancellor, even as his financial rules were being strained to the limit.
It highlighted that the vast majority of the Government’s 10p rescue package – £2 billion out of £2.7 billion – had gone to people who had not even lost out from the original tax change.
The committee also called on him to find £1 billion each year to compensate the more than one million losers who had yet to be compensated.
Mr Darling is also under pressure to find £410 million to compensate drivers for the shake-up of road tax. Without a promise of action, the Government faces another Commons rebellion next week.
The committee confirms that Mr Brown would have known when he made his 10p decision in 2007 that there would be losers. Ministers took decisions on the basis of a “thorough distributional analysis”, according to Nicholas Macpherson, Permanent Secretary to the Treasury.
But it was the report’s reference to “rabbits from the hat” – a clear reference to Mr Brown’s habit of making crowd-pleasing announcements at the end of his Budgets – that was seized upon by the opposition parties.
Vince Cable, the Liberal Democrat Treasury spokesman, said: “This report is a devastating criticism of the Government’s tax policy. The reference to the short-term benefits of ‘pulling rabbits from the hat’ is an accurate but cutting description of Gordon Brown’s abortive attempt to use his last Budget for political gain.”
The Conservatives called the report a damning indictment of Mr Brown’s first year. Philip Hammond, Shadow Chief Secretary, said: “It shows that his policies are driven not by conviction but by short-term political calculation, with the poorest in society paying the price.”
Mr Darling is facing fierce pressure from Labour MPs to drop his Budget plan to impose bigger road tax charges on high-emission cars bought since 2002. It is believed that some advisers within No 10 and other ministers are also pressing Mr Darling to do a U-turn. But the Chancellor has no money in the kitty to meet the £410 million cost of abolishing the plan now, and the most he can offer before the Commons debates the issue next week is that he will consider the matter in the run-up to his autumn Pre-Budget Report.
Today’s report points out that the £2.7 billion package unveiled in May was a one-off measure for this year and says that Mr Darling must include permanent compensation for all 5.3 million households who originally lost in the autumn Pre-Budget Report.
John McFall, Labour chairman of the committee, said: “The May 13 measures, whilst welcome, do not go far enough. There are still 1.1 million losing households, many of whom are on low incomes and who are being hit hard by rising food and fuel prices and the slowdown in the economy.
“The Government’s short-term priority must be to make every effort to compensate these people in full. The Government must not let this issue slide into the background and will need to produce fresh proposals to fully compensate these 1.1 million households by the time of the 2008 Pre-Budget Report.”
The May 13 measures did have merit in their “simplicity, transparency and greater incentives to work”, the report said. Future reforms should aim to keep low-paid people out of income tax while avoiding further complication of the system. Mr McFall said: “Raising personal allowances was clearly not a well-targeted way to compensate the losers from abolition, but had the merit of offering a quick solution.”
The MPs urged Mr Darling to use the Pre-Budget Report to launch consultations on any future changes to personal tax, rather than keeping them secret so as to be able to “pull a rabbit out of the hat” on Budget day.
Mr Brown reacted to the Henley by-election result — Labour trailed in behind the Tories, Lib Dems, Greens and BNP — by saying: “By-elections come and by-elections go. Of course, we have to listen to what people say.”
Lord Levy said that it was for Labour Party members to decide whether Mr Brown should be sacked. But in an interview with Newsnight he added: “I certainly, seeing the polls, would have to say that this is something that needs to be very seriously considered.”
The Prime Minister’s woes were compounded as a ComRes/Independent poll showed him 21 points behind David Cameron, with the Tories up two on 46 per cent, Labour down five points at 25 per cent and the Liberal Democrats up two on 18 per cent.

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Can we have a clear statement on the 10p issue. Is it still in operation or it was abolished. If it was abolished, are people going to get their monies lost during the time when the 10p was in operation?
Linford, Doncaster, UK
of 45 comments so far 44 seem to dislike Brown and Nulab, well over 95%, Brown's supporters seem few and far between yet according to the polls there's a hard core of around 25% of duffers, thickos morons idiots call them what you will, who still actually think this shower is worth voting for!
Albert Hall, kettering,
More miscalculations, or deliberate obfuscation of the actual figures?. This Government has a history of budget understatement, just look at the 2012 Olympic budget, the NHS computer system and the gross underestimate of the cost to the taxpayers of bailing out the banks, yet to be finalised.
pete, Croydon, uk
We all forget that Gordon has been running the economy since 1997.1st 3 years he continued the Tory policies then he got busy and implemented his own spend spend spend policy.Now whoever is in charge will have to pay pay pay. TW
TW, plymouth, UK
I could see all this coming when I emigrated 3 years ago.
People of Britain: you voted for Nulaber.
3 times.
You reap what you sow.
Jon Leigh, Safely out of it in rural, France
Rece
At the rate british pubs are now going out of business the breweries won't need to worry about them.
Dave, Mold, Flintshire
If, as GB says, he is listening to the public, why in the name of sanity is he still prime minister ? Almost everyone wants him gone, and he appears not to be hearing that.
Alan, London,
Hey Gordon...Gordon?..Gordon...hey, you there Grodon?
Nope sorry my mistake, thought you were listening
paul, nottingham, uk
"anyyone on income over £10,000 will be £120 better off."
Eh? I'm around £230 worse off and don't qualify for the £120 'compensation'. Just take the flak and re-instate it. Cheaper all round. The Governemnt never does anything the simple way. It would rather 'create' thousands of extra non-jobs.
Anthony, Brum,
A good chancellor Oh yeah! Pull the other one do. He sold the gold; then the company that constructs nuclear power plants to Japan. They are now preparing to make billion in China while Brown is getting the French to construct similar plants in UK. Has anyone heard of such daft business practice.
M. Cawdery, Portadown, Co. UK, EU
The "compensation" for the 10p tax fiasco is nothing of the sort. It will have to come from borrowing which we have to pay back - with interest.
So even with the compensation we'll actually be worse off than if the change wasn't made! Do we want them to ADD to that with another billion+ ?!?
Jay, Farnborough,
Gordons pet project to right of African debt simply made the corrupt officials in Africa richer and the poor poorer. Another good move Gord.
By the way where is our Gold sold at $270 or so.? Current price over $ 900. Nice one Gord.
John Bull, Farnham , Surrey
I too am begining to feel sorry for the looser. He really should pack his bags and go.It is becoming embarrasing to watch.
John Bull, Farnham , Surrey
Gordon Brown couldn't sell £1 coins for 50p each.Oops! I'm sorry, he can - after all he did sell our gold for about 1/3rd of it's current value. Prudent? Puerile is a better description of him.
A.M. Williams, Stafford,
Ah, poor Gordon Brown, so tax-happy that he quite forgot to consult the Law of Unintended Consequences.
Dennis Eagan, Colorado Springs, US
James of London. Yes, clearly the simplest solution would be to bring back the 10% rate but that would be admitting that he had made a mistake wouldn't it? We all know that Brown NEVER, NEVER, makes mistakes don't we.
Richard, Alicante, Spain
In times of economic turbulence a country needs a strong goverment to lead it.This Labour government should do the country a favour and step down. further failings of this government are compounded by the fact that they didnt set aside any money for the eventual downturn in the economy
Rich Hutchison, Edinburgh, UK
What on EARTH was the point of removing the 10p bracket if they are just going to pay people back the extra tax they are taking?
This was one of THE worst political decisions imagineable - hit the lowest earners, then waste a furtune trying to give it back. Pointless.
Hibbo, Dundee,
£1Billion? Peanuts. Gordon can raise this amount with further tax on petrol at 1p a litre
Andy, Bristol, uk
When the state of the nation sinks to the present position and the government so obviously incompetent there needs to be a mechanism to halt expenditure on doctrinaire policies. Also an Act to reduce all poorly thought out taxation to enable taxpayers to meet essential ouitgoings. Then an election
Dicken, Farnborough, UK
Here is a novel idea stop sending truck loads of money to personal pet projetcs such as Africa.Time to sort out your own house first!!
peter andrew, montreal, canada
I immigrated here 15 months ago. I've been working F/T a total of 13 months and so far have never earned more than 12,500 gross pa (overtime included). By far the bigger post in my expenses is the rent (don't qualify for benefits). And I save each month... Should I send my spending diary to the PM?
Carol, Bristol,
If Brown cannot see that this last year has been a disaster and that he is deeply unpopular, then he is on another planet and that alone is reason enough for the Labour Party to give him the boot. His refusal to admit his errors makes him look even more incompetent.
Phil, London,
how can it cost 1 billion, when they are only giving back what they took in the first place
tony, manchester, england
He thought that he could get away with the 10p tax abolishment ,making millions of poor people poorer. He was found out to be a deceiver and shifty. He was forced to lose face and back track,even after he said nothing could be done. The whole episode shows him to be grossly incompetent . Sack him
Eddie , Newcastle, Co. Down
He and his team must have known that ow paid taxpaers would lose, unfortunately the added tax allowance only gives back the lowearners what they lost and anyyone on income over £10,000 will be £120 better off.
Douglas Blaney, Glasgow, Scotland
I read this morning that in the UK there is, among all the major economies, the highest recorded level of household debt at 173% of income and this is allied with the highest cost of living in any western economy.
Buggins wants to be judged on his stewardship of the UK economy. Fine.
m collins, Leeds,
"Of course, we have to listen to what people say." Brown said that yesterday, he also said almost the very same words exactly one year ago, outside Number 10.
The root of every one of Brown's problems is that he does NOT listen to people; in fact, he REFUSES to listen to anyone.
Mike, Brighton, England
The amazing thing about is the amount of polital capital the tories have made out of this. They were against the 10p tax band when Brown intoduced it and would'nt reinstate it. The only tax policy Cameron has is to remove inheritance tax from the rich and increase taxes on the poor to pay for it.
Frank, Aberdeen, uk
Is there any truth in the rumour that Alistair Darlings computer has been replaced as its delete button was worn out?
Brian Christley, Abergele, UK
"Gordon Brown is facing a £1 billion annual bill" er, no he isn't, we the taxpayers are.
marksany, Grays, Essex
Instead of tinkering and trying to rectify a mistake, would it not be simpler for this PM to bring back the 10 pence rate ???
james, london,
SK from East Sussex clearly thinks that income of less than £18k is a part-time job and that there is a strong demand for employing pensioners. Oh that this were true.
Gordy was gloating when he announced the reduction to 20p basic rate. Only right then that he should glower now he has been rumbled
Ian Cooper, Newark, Notts
This is rediculess. Why did he not just cancel the 10p cut would have cost the country alot less. Incompitence!
Dean, Southampton, England
Unbelievably stupid to do it at all, and totally incompetent to attempt to mitigate its effects by other means since.
Only sensible course: reverse the change, everyone affected would be put back where they were, no one else is drawn in, and the cost is the minimum.
Keep digging, Gordon.
Roger, Leeds, England
He could start pruning back severely on public expenditure rather than trying to fund all these concession, buy votes and so on. This never seems to figure in the equation because it's not part of his "vision" whatever that may be now. Time to go.
JohnM, Perth, UK
I am minded of a slogan for a certain brand of Brown Bread. To paraphrase it...
'Don't just say Brown, say Hopeless !'
Adrian, Sherington, Bucks, UK
Some people lose and some people win in any changes to tax levels. That's the whole point of them.
The compensation idea is inherently flawed. If abolishing the 10p tax rate is unfair, restore it and add 2p back onto the basic rate to pay for it.
Malcolm McLean, Bradford, UK
I am a 61year old female ex BT pensioner. Since the abolition of the 10p tax can prove through my pension pay slips I am £204.00 per annum worse off and am told I will be compensated by £120.00,is this right? Then it is the unknown tax until I am 65 with no eligibility for any tax benefits.
Betsey Maureen Shepherd, Dronfield, England
SK, East Sussex.
We don't all live in your prosperous location.
Up here, low earners are low earners by necessity.
Jobs are low paid, and even lower paid immigrants compete !
There are lots of people, like me, who get no Tax breaks/benefits at all, never have, and probably never will !
cap, Lincoln,
-'Thank God Nu-Labour don't run British breweries; there would not be a single pub in Britain with beer in the cellar!'
Yeah. As it is, there are plenty of pubs with beer in the cellar, but thanks to the government's highway robbery duty on alcoholic drinks, people can't afford to buy it.
Tom Watson, Stafford,
Gordon Brown needs to learn something about finance and accounting.
Perhaps he should seek advice from a corner shop keeper.
peterj, malvern, UK
And middle England will foot the bill for yet another one of McBrown's incompetent fiascos. When are the Labour Party going to wake up and ditch this looser before they go into total meltdown?
roger Kingston, york,
Gordon will simply add it the UK's credit card, along with all the other debt. Very prudent man you see; look at his investments in the NHS and education...
roger, london,
Its getting so bad, that I am actually feeeling sorry for Gordon..
Not really.
ronnie, bucks, UK
Please, give us a general election so we can put this government out of it's misery.
David, St Albans, UK
Everybody should contribute something to team UK. The first 10,000£ we earn should be taxed at 10p, then goes up to 20p. Simple fair and effective, too simple for this government!
john, bath,
I can't understand the fuss they have simply failed to describe it in modern the right way. In America this would have been called a well targeted financial stimulus package and received praise from all sides.
Michael Stalker, Manchester, England
Classic case of taking with one hand and paying out with another plus it will cost more bureaucracy wise which wouldn't have been the case if they had left it alone.
john, shrewsbury, uk
There clearly was a problem with cutting 10p tax rate for low earners and women 60-65 who are officially retired and cant claim other low earner benefits. But, the upside is that those earning between £18k and £36k will benefit. Others on low earnings could get a job or claim job seekers benefits.
SK, East Sussex, England
Thank God Nu-Labour don't run British breweries; there would not be a single pub in Britain with beer in the cellar!
Rece Porter, Orlando, USA