In reaction to the recent furore over the suggestion that the Coalition is conducting a spending review of universal welfare payments – middle class benefits in journalistic parlance – the satirical website The Daily Mash ran an article with the headline ‘Middle class could be forced to pay for things they can afford’. The article ‘quoted’ a “senior source” in government as saying: “`We looked into who would be adversely affected by scrapping the £87 a month child benefit for middle class families and realised pretty quickly that it was Oddbins and Majestic”.
The irony of this quip is that 15 years ago it might have been true. In 1997 the number of people paying the 40 pence rate of tax – then the upper rate – was just two million. Today that number has almost doubled. And the culprit? Fiscal drag.
Google it and you will find any number of technical definitions that sound like they have come straight out of an A-level economics textbook. You will even find reasons why fiscal drag is a good thing – which it is, in small doses. But ultimately it amounts to a tax rise by another name. Income tax thresholds remain static, whilst both prices and earning rise, with the obvious result that more people pay more tax.
Theoretically governments should address this periodically by raising income tax thresholds. Indeed, back in 2008 the TaxPayers Alliance estimated that the 40 pence bracket should be around £5,000 higher than its current level to have kept pace with wages, whilst the Institute for Fiscal Studies calculated that families are, on average, paying almost £900 a year more to the government because of fiscal drag and other tax rises than in 1997.
Yet giving money back was hardly the calling-card of New Labour, least of all of the profligate tax-and-spend policies of Gordon Brown. First as Chancellor and then as Prime Minister, all Brown had to do was keep quiet and watch as more of the public’s hard-earned money found its way into the Government’s coffers.
Now senior teachers, nurses and police officers are being forced to hand over half (40 per cent income tax plus National Insurance) of the top-slice of their income to the state. They may not exactly be on the breadline, they may continue to earn comfortably in excess of the national average wage, but did we really intend for such people to be hit so hard?
Put in this perspective, it becomes increasingly clear why so many seemingly affluent people are concerned that they may be deprived of child-benefit or winter fuel allowance. In the early 1990s, such payments might have contributed towards little Johnny’s piano lessons; now they make a vital contribution to household bills.
Labour has seized on this and it appears that the next leader of the Labour Party will be committed to the universality of benefits. Interviewed in The Guardian, Ed Miliband drew a distinction between a “residual welfare state that is just for the poor” and a “more inclusive welfare state” that encompasses the middle classes. Likewise his brother, notionally the right-wing Labour leadership candidate, when asked on Newsnight recently whether he would “stick to universality”, he gave the straightest answer you are ever likely to hear from him: “Of course”.
This stance may give Labour a clear dividing-line on which to campaign, but it also presents the Coalition with an opportunity. If middle class benefits are only expected because so much is taken away in tax, then the answer becomes startlingly clear: lower taxes. It is almost a platitude to say that this needs to be done fairly and with an emphasis on reducing the burden on the least well-off but it bears repeating nonetheless.
Benefits may need to be cut now, but the pain of this could be offset by a commitment to review tax brackets over the life of a parliament. The Coalition got off to a good start with its commitment to adopt the Liberal Democrat policy of increasing the tax free allowance to £10,000 with a view to taking the poorest out of the tax system altogether, but it is not just the poorest who are suffering. As Ed Miliband is so fond of reminding audiences, only five per cent of people in the UK earn over £60,000. The Government must answer the Sun’s call to offer them some light at the end of the tunnel as well.
After all, if the aim is for people to have more money in their pockets, why take it away in the first place?