These days it's rare for the Deputy Prime Minister to enjoy a surge in popularity, but his demand last week for income tax cuts seem to have done the trick. Mr Clegg's call for the Chancellor to accelerate the proposed increase in the personal tax allowance, and make earnings up to £10,000 a year tax free by next April, was followed by a 12 point boost to his opinion poll ratings. It seems almost everyone likes a tax cut, especially one that reaches low earners; this policy has 83% approval in a YouGov poll. The personal allowance currently stands at £7,475; it was increased by £1,000 in last year's Budget but a smaller increase of just £630 is scheduled this April, taking it to £8,105. Not until 2015 will it reach the LibDems' target figure of £10,000.
Danny Alexander, Chief Secretary to the Treasury, wants the Liberal Democrats to go into the next election promising to get the allowance to £12,500, so that earners on the statutory minimum wage would be unlikely to pay any income tax. That's a policy that Boris Johnson appears to be supporting, which is no surprise: the Mayor of London is nearly always first off the blocks to give his backing to policies which are not only popular but also authentically Conservative. As the Conservative half of the Coalition seems to be tying itself in knots over Stephen Hester's bonus, flirting with the idea of increasing property taxes, and watering down its opposition to bailing out the Euro, a recognisably Conservative response to Britain's economic plight would be timely. Yet George Osborne seems content to let the LibDems make the running on higher personal allowances, and for Nick Clegg to take the credit.
But it is worth noting that this idea has long been advocated by Conservative politicians and advisers. The Tax Reform Commission, set up in 2005 by George Osborne as Shadow Chancellor, and chaired by Lord Forsyth, proposed big increases in the personal allowance as part of its call for lower personal taxes. The Commission (of which I was a member) was asked by Mr Osborne to make recommendations for a fairer, flatter tax system. The reasons why we wanted to take 2.5 million low paid workers out of tax were to incentivise work amongst those for whom marginal rates were most likely to affect behaviour, to reduce churning (whereby income is handed over in tax and then handed back in tax credits), and of course to enact the Conservative principle that earners will usually make better use of their income than government ministers spending it on their behalf.
When the Commission published its report in 2006, Conservative economic policy was, sadly, stuck in its “sharing the proceeds of growth” phase. Although George Osborne said he was a “low-tax Conservative”, he distanced himself from the report, fearful that the Tories would be characterised as tax cutters. For the Liberal Democrats, Vince Cable described the Commission's recommendations as “irresponsible.” In the changed economic climate of the 2010 election, and with a new party leader, Liberal Democrats were ready to make the case for taking the poor out of tax. But the Conservatives were still hanging back, hobbled by their fear of “unfunded tax cuts” - a fear that seems to linger on today.
It's not too late, however, for George Osborne to start sounding more enthusiastic about cuts in personal taxation. The Tax Commission's arguments for taking the low paid out of tax are more resonant than ever. If we want to boost growth we must incentivise work. An increased tax threshold is also entirely consistent with the move to Universal Credit, by encouraging work participation and reducing marginal rates as well as benefit overlap. And instead of allowing government spending to go on increasing, we need to encourage private spending. The lowest paid, who have been hardest hit by inflation in food and energy costs, not only need a tax cut most, they are also most likely to spend it on goods and services, creating a virtuous circle of growth.
So Nick Clegg's proposal is not only popular, it's also politically and economically attractive. Will it spur George Osborne into revising his Budget plans? My personal bet is that he is already reviewing the timetable; whilst I don't think we'll get to £10,000 tax-free this year, the threshold increase will not be slowed but will go up by another £1,000, taking us faster towards the goal. In contrast to the complex, interventionist and small-print tinkering of the Autumn Statement, a few crisp and memorable pro-growth announcements on 21 March would be very welcome. Announcing a faster timetable for the £10,000 personal allowance certainly deserves to be one of them. It would also give the Chancellor the opportunity to reclaim lower personal taxation as a genuinely and originally Conservative idea.