IMF calls for tax increases

CHRISTMAS is arriving late at the Treasury. The ink had barely dried on the Pre-Budget Report before a team from the International Monetary Fund arrived to conduct its audit of the British economy.

As has been the case in recent years, the IMF's concerns are largely our concerns. The build-up in public spending to address under-investment in health, education and transport is so rapid that it will cause indigestion problems.

Moreover, the Fund is not thought to be entirely convinced that the Chancellor has the balance of his tax policy quite right.

If the IMF had its way, the government would be deploying user charges more widely to address the widening hole in the budget, put at £37bn in 200 3/4.

Independent forecasts assembled by the Treasury suggest that instead of improving in 2004/5, the public finances could remain as deeply in the red at £36.9bn against the Pre-Budget Report projection of £31bn.

The IMF takes the view that one way of dealing with the revenue shortfall would be to broaden the base of VAT to include items such as children's clothing, food and newspapers. But the Chancellor will have no truck with this, as he has made clear at European Union gatherings.

The latest jobless data provides clues as to why tax income in Britain is under pressure. It shows unemployment at its lowest level for 28 years, but reveals critical underlying shifts.

Over the last three months, the number of full-time employed fell by 92,000 and the number of people in self-employment climbed by 80,000. An increasing number of construction workers have changed their tax status. By becoming self-employed and classifying themselves as small firms, such people can take advantage of some of the enterprise incentives offered by the Chancellor - to the detriment of the overall tax take.

As for the current recovery, the figures show the transfer of jobs from manufacturing to the public sector continues apace. It could also be argued that by extension the construction boom is public-sector driven, too - much of the spending is on hospitals and the like under private finance initiative contracts.

Despite Brown's optimism about growth in the Pre-Budget Report, the private-sector economists - proved wrong by the Chancellor this year - are still more pessimistic. They estimate 2004 output at 2.6% higher, well below Brown's 3% to 3.5%. On past form the IMF is likely to be closer to the independent forecasters than Brown.

Certainly, the Bank of England sees a global upturn and still believes that policy will need to be tightened next year. The only person calling for an immediate rise in interest rates in December was deputy governor Sir Andrew Large, who is fearful of the destabilising build-up of household debt and would like to slam on the brakes as soon as possible.

He, too, may receive some support from the IMF.

Penrose result

NOW here is a surprise for Equitable Life's long-suffering policyholders. Almost three years after the troubled insurer closed its doors to new business, the official report on the debacle by Mr Justice Penrose is expected to be delivered to the government today.

The draft report, the result of investigations that began in August 2001, is understood to run to more than 1,000 pages including evidence.

The most recent delays have been caused by the process of 'Maxwellisation' under which individuals criticised - including former Equitable executives - are given the chance to respond.

That is not the end of it. Responsible government departments including the Treasury, the Department of Trade and government legal officers still need to scrutinise and comment on the report before its release. The hope is that this can be done quickly, with the findings being published early next year.

Unfortunately for Equitable Life policyholders and pensioners - many of whom have seen their retirement ruined - this is not the end of the process, despite the fantastic delays in delivering an authoritative report.

Efforts to get the government to acknowledge maladministration by regulators have failed so far, despite plenty of evidence that Equitable was allowed to window-dress its accounts to make its balance sheet look healthier than it was.

If, after all the distress and poor regulation, the government seeks to wiggle off the hook of compensation, it will be a disgrace. The lives of tens of thousands of elderly people have been ruined. This hardship must be recognised.