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City Republic: Darling to slash VAT and raise top rate taxes

LONDON - Here we go then, VAT to be reduced from 17.5% to 15% to pump £12.5bn into the economy and the top rate of tax to be increased to 45% on incomes of over £150,000 -- although not until after the next election.

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That's what we think chancellor Alistair Darling will announce this afternoon in his pre-budget report anyway.

No doubt there'll be other eye-catching micro-measures too, such as a move to stem house repossessions, but VAT is the big one.

When the US government tried to get the economy  moving earlier in the year it made a one-off $150bn payment to taxpayers, which only served to boost Wal-Mart's takings for a short while.

So reducing VAT (in effect a purchase tax) is a much better idea because, until the reduction is clawed back, it will be a continuous measure which, depending on its timing, should boost sales at Christmas and beyond.

Actually there's probably no need to worry about Christmas sales, the retailers themselves can handle that.

It's the January to March period that's crucial in consumer sales because that's when banks withdraw funding from retailers when they don't think they're going to be able to pay their March quarterly rent bills.

As for the increase in the top rate of tax, this looks extremely modest (50p is many people's preferred rate) and will only raise about £1.2bn.

But it will at least give the impression that the rich are suffering as well as the poor so, politically, it's a smart move. If the Tories oppose it -- they've already warned it will "drive" businesses out of the country, which is rubbish -- they'll look even more isolated.

The really smart move would be to keep VAT at 15% as it's much easier to work out, making business simpler, and might actually encourage more people to pay VAT on things like household repairs rather than trying to do cash deals.

So it could cost less than the pundits think.

Will all of this get the economy moving? It will help a bit and that, realistically, is all the Government can aim for.

Citigroup takes centre stage in bank drama

A short time ago Citigroup was the world's biggest bank valued at £270bn.

On Friday, following a savage run on the shares on Wall Street, it was worth a mere $20bn so the US government has stepped in to rescue it.

It was, as they say, too big to fail and there was little likelihood of anyone stepping in to buy it. In any case a merger with another big bank would have created an even bigger and lumpier entity and it's arguably too big already.

The US Treasury's Troubled Asset Relief Program is going to take some of its dodgy debts off its books and underwrite its lending at an immediate cost of  another $20bn and potentially much more in loan guarantees.

Is there any of the $700bn TARP money left?

Meanwhile, back in the UK, Barclays is to face its shareholders today who are angry that it's issuing shares equivalent to about a third of the company to Middle Eastern investors at preferential rates.

The board has, in effect, threatened to resign if shareholders don't vote this through. So it probably will be -- reluctantly.

And Royal Bank of Scotland, which is likely to be 57% owned by the Government in a couple of weeks, has said it will keep offering loans to existing small businesses at last year's rates.

While Lloyds TSB CEO Eric Daniels says the bank (due to be 40% owned by us) is aggressively increasing its share of SME business and mortgages.

Will this get the banking sector as a whole lending?

Once the various recapitalisations go through it probably will -- although not at the free and easy levels of recent years.

Woolworths on the brink

Woolworths is trying desperately to strike a deal with its bankers over its debts so that it can sell itself for £1 to Hilco, an outfit that specialises in restructuring bust companies.

Woolworths' big problem (apart from the obvious one of not enough customers) is that it's left the whole process too late (it says it's about to run out of money) and its bankers are led by GMAC (which has lost billions in the US car market) and a subsidiary of Bank of Ireland which is itself in the process of being rescued by the Irish government.

GMAC is the old General Motors finance arm that was bought by private equity outfit Cerberus last year in a fit of madness.

So it has enough on its plate (as does Bank of Ireland) without a retailer that has a good music distribution business but nothing like enough people in its 800-odd stores.

But Woolies employs about 30,000 people so some sort of deal will probably be stitched together.

Car companies peer over the cliff

The big three US car makers took a break from life in Detroit last week by going to Washington, to be eviscerated by a Senate committee.

GM, Ford and Chrysler were pleading for government money but things started badly (a senator inquired if they'd travelled by individual private jets, they had) and got worse.

Now the board of GM has flatly contradicted CEO Rick Wagoner who said that bankruptcy (Chapter 11 administration) was not an option.

It might have to be says the board and there's a growing feeling in the US that the only way to sort out the industry is putting at least one of them through administration, which would then be able to unwind some of the costly healthcare and pension benefits they currently offer and clearly can't afford.

Staggeringly, it looks like it might be GM, the world's biggest car company, and not the perennial favourite Chrysler.

Meanwhile Indian conglomerate Tata, which bought Jaguar and Land Rover (JLR) from Ford for $2.3bn in March, wants £1bn from the UK government to keep its car factories going as sales all but disappear.

It's all going wrong for Rajan Tata, owner of one of India's biggest companies.

Two years ago he paid $11bn for giant British steelmakers Corus and profited mightily through the tail end of the Chinese property and construction boom.

But now that's gone into reverse and so have Tata shares, leaving the company on the lookout for a state handout for its expensive car business.

JLR, like Woolworth, is another big UK employer so the problems for the Government just keep mounting up.

Stephen Foster is a former news editor of Campaign, former editor of Marketing Week and Evening Standard ad columnist. He is a partner in Editorial Partnership and writes the blog www.editco.net and Politics of the Media for Brand Republic.

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