Almost one in 15 workers paid the 40p, then the new top rate, when Nigel Lawson introduced it in his great 1988 budget. Today, that rate has risen risen to one in six – 800,000 people, including a quarter of nurses and a third of police: the Office of Budget Responsibility estimates that it will reach one in three within a decade. Lawson didn’t intend his top rate to catch nearly so many, and it only has because successive Chancellors, including George Osborne, have either lowered the threshold at which it is paid or frozen it, thereby ensuring that more people are dragged into the band.
Matters can’t continue in this manner indefinitely, and David Cameron’s announcement that the Conservatives will raise the threshold to £50,000 by 2020, if they win the next election will please many better-off earners – especially in London and the south-east where they tend to be concentrated. This group of voters are natural Tory ones (or should be) – and also include the media class which kicked up rough about the restriction and removal of child benefit from 40p rate taxpayers. People who would gain from a rise in the 40p threshold include people like me.
This is an agreeable state of affairs, but I am not at all sure whether the plan is a good one, for three reasons. First, because tax cuts should go hand in hand with spending cuts. Earlier this year, the Institute of Fiscal Studies estimated that “the post-2015 administration from having to make the deepest cuts since 1948”. Nothing has happened since to alter this challenging task, and nothing has been said since to show how government will meet it. There is a child benefit freeze here and a working benefit squeeze there – but nothing that matches the immensity of the task.
Paul Johnson of the IFS said yesterday that it is hard to see where the commensurate £7 billion cut will come from to match the rise in the higher rate threshold. The second reason takes us from the economics to the timing. It is easy to see why Cameron and George Osborne should want to make this offer early. To quote Lynton Crosby’s second-best known saying, you can’t fatten the pig on market day. (The first is something to do with scraping barnacles off boats.) In other words, it’s no good making a last minute tax cut offer that thus comes too late for most voters to know it’s there at all.
None the less, the leadership is now vulnerable to the accusation that, in a fit of election panic, it has taken the primrose path of dalliance, “like a puffed and reckless libertine”, rather than tread the steep and thorny way to deficit reduction. The emotional coherence of Osborne’s pitch relies on putting deficit reduction first, last and always – and, remember, some two-thirds of the deficit remains. The Chancellor will not have eliminated it by the end of the Parliament. The Conservative leadership can’t afford to go soft on their main economic commitment.
Finally, the timing leads us to the politics. The principal problem for the Party remains that it is seen to be the party of the rich: the pool of would-be Tory voters is simply smaller than that of Labour ones. Those who pay the 40p rate but not the 45p one aren’t rich in any meaningful sense of the world. But this is not how it will seem to many voters outside the south-east and London (and to many within both, too). Incomes are lower in the Midlands and the North – which just happens to be where the bulk of marginal seats that Cameron must win next May are concentrated.
Labour will have a lot of fun with claims that the Conservatives plan to “reward their rich friends” – and will extend the argument to the planned rise in the income tax threshold itself, arguing that better-off people gain disproportionately from it, and that it doesn’t help those who don’t pay income tax at all. None the less, to increase the threshold is a thoroughly good idea. As Mark Field argues on this site today, there is a limit to how high it can go. But the plan originally mooted by Lord Forsyth’s Tax Commission makes a lot of sense.
It makes none to tax poorer workers and return the money to them in tax credits – allowing the bureaucracy to carve off a slice of the proceeds in between. Ideally, no-one below the Living Wage level should pay income tax at all – and the cost and spread of tax credits reduced in consequence. As Robert Halfon and others have said, there is also a good case for raising the National Insurance threshold, since it kicks in lower than the income tax one. All this raises the question of whether the proposed tax threshold and 40p threshold rises should be first in any tax cuts queue.
Our view, set out in the ConservativeHome manifesto, is that reducing the burden of debt we have placed on future generations must take precedence over tax cuts, and that these must be focused on those taxes that do most to ‘gum up the works’ of the economy – especially those that get in the way of homes, jobs and savings for ordinary working people. At the forefront of these are employer’s and employee’s National Insurance Contributions and Stamp Duty. Above all, deficit reduction must come first if, as Crosby doesn’t quite put it, the Conservative boat is to be fattened for election day.