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Home Opinion Too clever chancellor looks snookered

Too clever chancellor looks snookered

Hopi Sen - 22 March 2012

George Osbourne’s budget gamble on top rate income tax has given Labour new political vigour

The annual budget speech is perhaps the defining moment of Britain’s political year.

It is a huge weapon in the armoury of even the most reviled government, a chance to use the power of office to define the political ground, force your opponents onto tricky political terrain, and demonstrate to the country exactly why they should keep you in office, not the other lot.

Even in Labour’s last years in power, when the economy was in collapse, deficits were increasing and the Labour leadership were beset by crisis, the budget could still shape the political debate.

In 2009, after 12 years in power, Labour decided to impose a new top rate of income tax, affecting those earning over £150,000. This was set at 50% of income above that level, and was intended to raise around £3 billion a year. 

Labour was nervous of appearing to increase taxes, so this new tax rate was always spoken of as a temporary tax rate. But while death and taxes are life’s certainties, you can argue that the conversion of a temporary tax into a permanent one runs them pretty close.

The Conservative party , naturally, hated the 50% tax rate.  Yet they knew that to pledge to abolish it would be politically disastrous in an era of spending cuts, and they wanted to be elected.  For the last few years they have restrained themselves, saying only that they would measure its effectiveness, and that it should be judged on how much money it brought in.

Further, the forming of a coalition with the Liberal Democrats hinted that removing the “temporary” tax cut would be difficult. It began to look like the inability to cut taxes on the wealthy was becoming a symbol of Tory impotency, at least to the Tory true believers.

Not any more. The chancellor, George Osborne, thought he could run a three cushion shot to pot the black.

First, placate the Liberal Democrats by increasing the amount people can earn without paying tax significantly, a long held passion with his coalition partners.

Second, defuse criticism from the opposition by squeezing the super wealthy, by taxing property worth over £2 million and cracking down on tax avoidance.

Third, commission a study to demonstrate the 50p rate had brought in little money in the first place, and could therefore be cut at minimal cost.

Instead of potting the black, however, Osborne may have snookered himself behind the blue (Apologies to my European friends who may not follow snooker, for this extended metaphor.  I understand that if he were German, George Osborne would be saying ich habe mich festgefahren)

First, in order to extend the number of people not paying tax (and also to rectify a previous, too clever by half scheme to cut a child benefit), he had to squeeze elsewhere. He chose to hit two groups – middle class pensioners, and those earning a little over £40,000 a year. This has not gone down well. At all.

The solidly Tory press is outraged, and the pensions group, who wield a great deal of influence in a greying nation, regard the changes as an assault (though actually, middle class pensioners have got off pretty lightly amidst the spending cuts). 

Second, by squeezing the elderly and the middle class at the same time as cutting taxes for the wealthy, Osborne has given Labour leader Ed Miliband the chance to play the outraged voice of middle England.  Labour’s leader is never happier than when he can present himself as the voice of the vast majority of the populace, disgusted by the self-interest and venality of the Tory right. 

Faced with the sight of a Tory government squeezing the middle class while giving tax breaks to the rich, he was in his element, and turned in his most effective performance since becoming leader, inviting the wealthy Tory cabinet to admit that they would personally benefit from this change.

The Tories protest that they’re taxing the rich more elsewhere. Five times as much, they say. But they’ve been too clever. The new tax measures are complicated and hard to understand.  The tax cut, is big, simple, and lends itself to headlines.

In addition, even moving people out of tax isn’t quite as generous as it seems. This will happen next year. This year, millions of families will suffer as their tax credits are cut, with many losing hundreds of pounds.  So quite a few families won’t be feeling a warm glow.

Where does all this leave Labour? Labour’s budget response has been crisp and effective (helped by the fact that almost the entire budget was leaked in advance). The Labour team, spearheaded by Ed Miliband, Ed Balls and rising star Rachel Reeves have effectively attacked the government, and seem in tune with what the majority of the media are saying.

But while the opposition has been at its most effective, Labour’s been almost silent about what it would do instead. Labour has said the government has the wrong values, and so is using the wrong methods to cut the deficit.  Yet Labour is uncomfortably aware that it would also need to cut the deficit, and while it would like to do so by raising tax revenues through growth, they might not be able to. So the government will be asking Labour MPs “what would you do?” for a while yet.

The other problem for Labour is that it’s not quite clear what, if anything, a Labour government would get rid of from this budget. Just as the Tories were politically wary of cutting taxes on the rich, so Labour is wary of putting them up.  The pensions change, while unpopular is actually quite sensible in policy terms (a high tax free allowance doesn’t focus support on older people that need it most). If those things outrage Labour now, shouldn’t we have the courage to change them later? I expect the left of the Labour party will be demanding higher taxes on the rich in very short order, and why shouldn’t they?

So, to return to my snooker metaphor, George Osborne may have attempted too risky a shot and snookered himself, but he might have tempted Labour to pot the red, which might not give the left all the points they need to win.

A contribution to State of the Left - Policy Network's monthly insight bulletin that reports from across the world of social democratic politics

Hopi Sen is a former head of communications for the Parliamentary Labour Party. He is now a consultant, writer and commentator. He also blogs at hopisen.com

This is a contribution to Policy Network's work on The limits of nation state social democracy.

Tags: George Osbourne , Budget , Chancellor , Ed Miliband , Squeezed Middle , Pensioners , Income tax , 45% , Labour , UK , Inequality , Hopi Sen , State of the Left

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