Tax net snares record numbers

MORE people than ever will become taxpayers over the next two years, intensifying fears that tax rises will halt an already shaky recovery.

When the changes announced in the Budget come into full effect in 1996, 26.3 million people will be paying tax on their income - an increase of 1.2 million on this year and the highest figure since income tax was invented as 'a temporary measure' more than 200 years ago.

The revelation, in a series of Treasury answers to questions from the Labour Party, will increase the pressure on the Treasury and the Bank of England to allow another interest rate cut. Downing Street is already pushing for lower rates to shore up the faltering recovery.

John Townend, chairman of the Conservative back-bench Finance Committee, described the figure yesterday as 'a very damaging scenario' and predicted that the Cabinet would cut taxes before the general election to forestall the huge growth in payers of income tax.

Labour pointed out that most of the new taxpayers will be widows, pensioners and the low-paid. Breadwinners will begin paying tax when their earnings reach only pounds 93 a week.

The growth in numbers of income taxpayers is disclosed in Treasury statistics given in written parliamentary answers by the Financial Secretary, Stephen Dorrell. The Shadow Chancellor, Gordon Brown, said last night: 'The Government cannot say that economic growth is the main factor forcing more people into tax.

'Of the 1.2 million additional taxpayers, only 300,000 at most come from an increase in the workforce. The facts are that thousands will be drawn into paying tax for the first time.'

Ministers now concede that the last interest rate cut - a quarter of a percentage point - was insufficient to produce any impact, but are divided on whether a future cut should be of the same size or a riskier half point. Downing Street is keen for a rate reduction - probably before the Eastleigh by-election and the local elections in May.

Figures published last week that people are borrowing and spending less as they wait for tax increases to take effect next month. There is little evidence of inflationary pressure building up within the economy. But the Bank of England, now responsible for the precise timing - but not the direction - of interest rate changes, is resisting the pressure for a cut.

One senior Tory backbencher, Ian Taylor, MP for Esher, said that the Government had scope for a further quarter-point reduction but that anything more substantial could provoke a move back up again later.

This year, the Treasury admits, 300,000 people will be drawn into the tax net, 140,000 of them pensioners. Next year, the figure is 600,000 and by 1996, a further 300,000 will have joined them.

'The figure represents 400,000 more taxpayers than in 1979 at the end of the last Labour government,' Mr Brown insisted. 'So these new figures contradict all government claims - repeated by Treasury ministers and the Prime Minister - that there were more taxpayers under Labour.'

Describing the three successive years of higher taxes as 'a triple whammy', the Shadow Chancellor added: 'While all those on pounds 64,000 a year are still better off after government tax policies, widows and lone parents are worse off this year, next year and the year after that. A three-year hit on their living standards.'

John Watts, Conservative MP for Slough and chairman of the Commons Treasury Select Committee, said he did not find the Treasury figures 'necessarily shocking'. He added: 'It is unfortunate if people are drawn into the income tax net at a lower cash income than previously.

'But over the years the number of people in the workforce has been increasing steadily, and is now the highest ever.'

The Government's difficulties were thrown into sharp focus by ministers' dilemma over the timing of the Eastleigh by- election, caused by the death of Stephen Milligan. On Friday local Tories selected Stephen Reid, leader of Basingstoke and Deane Borough Council, a twice-married father of four.

Although the contest is still most likely to take place on local election day, 6 May, Conservative Central Office is considering a snap poll in the constituency as early as Maundy Thursday, 31 March.

Mr Reid rejected suggestions that the Conservatives would have difficulties in defending a 17,702 majority after the string of government scandals. 'We will fight a campaign that leads to victory,' he said.