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Wednesday, April 04, 2007

Dividend tax credits row

There's a lot of confusion surrounding the row about the abolition of dividend tax credits, but the picture is at least getting clearer.

A Freedom of Information request from The Times was finally granted and the Treasury released advice given to the Chancellor, Gordon Brown, in 1997 as he was considering abolishing the credit. It seems Treasury officials advised that there would be an impact on pensions. The accusation is that Brown ignored such advice when he should have followed it.

The odd thing of course is that aside from the recently-published advice, none of this is new news. There was debate about this measure at the time and there has been since. Indeed, Tory Chancellor Norman Lamont cut the tax credit initially. This tax credit was seen in the 1990s as biasing the UK financial system away from investment and to dividends. In other words, the thinking was that pension funds were putting pressure on companies, even if implicitly, to pay out profits rather than reinvest for the long term in profitable ventures. Chancellor Brown cut corporation tax at the same time for the same reason. Since that time there have been changes to the way pension fund liabilities are calculated and in addition equity markets fell in the early part of this new century.

The timing of the announcement is unfortunate, linked it appears to a ruling on another FoI request, but there are no prizes for guessing who benefits most from stirring up this debate. The Conservatives are taking every opportunity to attack Brown. This is not unrelated to their assessment of the formidable challenge a Prime Minister Brown will represent.

How can we properly assess this debate? More later...when I have read through the documents released by the Treasury.

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