ANALYSIS:IN ADVANCE of tomorrow's British budget, television news reports at the weekend were filled with accounts of plans to freeze pay for public servants living in poorer areas, justified – it is argued – because higher state salaries are allegedly crowding out private employers.
At the same time, welfare benefit cuts, reforms of the National Health Service or changes to child benefit rules that will cost middle-income families dearly continued to occupy the minds of those affected.
Against this background, chancellor of the exchequer George Osborne seems determined to press ahead with plans to cut the UK’s 50p income tax rate for those earning in excess of £150,000. Following difficult months, the opposition Labour Party can hardly believe its luck. Still doubting that Osborne will go ahead with the proposal, Labour sees it as a potential own goal on Osborne’s part that could negatively define the Conservatives- Liberal Democrats coalition.
Osborne delivers his budget to MPs tomorrow in the face of anaemic economic growth, rising unemployment and a growing debt burden, despite the austerity measures that began in his first budget. On Sunday, he insisted that help would be targeted at middle- and low-income earners, particularly to bring more of the latter group out of the tax net in line with Liberal Democrat demands that have since become popular with Conservative MPs.
However, the political danger for Osborne is that everything he does could be drowned out by cuts to the 50p rate – even if the reduction is to 45p and not as far as the 40p threshold demanded by many of his backbenchers.
The 50p rate was introduced by Osborne’s predecessor at No 11 Downing Street, Labour’s Alistair Darling, in a move that even the cautious Scot describes as one “that changed the dynamics of the political debate”. Since then, there have been repeated charges that it fails the first test of a higher tax: to bring in more revenue.
Tax returns for 2010-11 had to be submitted on or before January. Under the Darling plan, the 50p rate was intended to raise £1.3 billion in that tax year and more than £3 billion for 2011-12, although some in the business world argue that it is raising little or nothing extra.
Osborne has wanted to get rid of the 50p rate from the off and, in his budget speech last year, said an ongoing tax at that level would “do permanent damage” to the UK.
A report commissioned from Revenue and Customs on the matter has already been given to the Treasury and one must assume, for now, that its contents give Osborne an arguable case for cutting.
Introducing austerity measures, Osborne insisted that “we are all in this together” – in one of the few political phrases of recent years that have entered general use, even if it is uttered more often in derision. To combat that derision, Osborne has accepted the desire of the Liberal Democrats for increases to the income tax allowance – not to the £10,000- a-year the junior coalition party demands by 2015, but significant nonetheless.
Equally, he will impose curbs to stop the mega-wealthy using offshore companies to escape stamp duty bills when they buy properties in Knightsbridge, Chelsea and other high-end districts.
Faced with public disquiet over the widening gap between rich and poor, Osborne is to introduce a general tax-avoidance rule next year, once a consultation process is completed over the summer. Under the change, Revenue and Customs will have to show that individuals or companies are engaged in something more than reasonable tax planning, although the outcome is likely to prove a feast for tax lawyers.
The move does not go quite as far as the “tycoon tax”, floated 10 days ago by deputy prime minister Nick Clegg, where a minimum tax threshold would be set, irrespective of whatever clever accounting is used.
Osborne is also expected to curb pension tax relief, although such a move would have to bite hard on upper-middle income earners if it is to raise significant sums. This is the very constituency the Conservatives would wish not to annoy.
The Liberal Democrats will not get the “mansion tax” on homes worth more than £2 million even though Osborne was prepared to agree. The idea fell in the face of opposition from prime minister David Cameron.
Two years into office, the UK is not achieving the economic growth that Osborne needs. The strategy had been intended to see UK through the worst of the economic storm by 2015 but, already, he has decided that the cuts must continue for two years more. Unemployment is 150,000 higher than a year ago. Youth unemployment figures are disastrous and the private sector is not replacing job losses from a haemorrhaging public service.
At every turn, British ministers have sought to put the euro zone’s difficulties front and centre, along with blaming Europe for much of the failure of the British economy to return to significant growth. Despite the euro’s travails, however, the UK has not outperformed the euro zone over the last two years and output – even allowing for recent improvements – is still far below pre-recession levels.
However, the impact of the euro zone crisis could have been far worse. Just under half of all UK exports are sold into the EU but, fortunately for the UK, most go to France, Germany and the Netherlands, not further south.
For months, Osborne has insisted that he would not risk the reputational gains won in the eyes of the markets through his austerity programme. “The days of unfunded giveaways are over – and they’re not coming back in this budget. Everything has to be paid for,” he says.
Indeed, he has won hands-down on this issue. Labour has yet to win back credibility with voters. The party complains about every cut but will not offer its own alternatives. In that context, Osborne must hope that if he proceeds to cut top tax rates, he does not offer the opposition a victory that it has been unable to win for itself.
Mark Hennessy is London Editor