Who should gain from any cut in income taxes? The Times’s (£) splash this morning raises the question again. It reports the Free Enterprise Group of Conservative MPs calling for tax cuts for “the middle classes” – the term used both by the paper and by Dominic Raab, a leading member of the group, who is quoted in the story. Raab says that the Government has done “a good job lifting the lowest paid out of tax, but the middle classes have been hit for six”. The group also urges that stamp duty to be scrapped on all homes worth less than £500,000″, a call highlighted by the report in today’s Daily Mail.
Raab is right about the “bracket creep” of the 40p rate. When Nigel Lawson introduced it in his 1988 budget, he made it the top rate (bringing that down from 60p). Since then, successive governments have raised the threshold at which it is paid by less than inflation, which has dragged more earners into it. Last year, the Daily Mail reported that “in 1978, it caught just three per cent of taxpayers. By the late 80s, it had risen marginally to five per cent. But today it is 12.5 per cent, and will affect a staggering 15 per cent next year”. In September, Paul Johnson of the Institute for Fiscal Studies predicted that “at least half of all basic rate taxpayers will pay 40p income tax over the next 15 years as millions more drift into the higher rate band”.
But it’s worth asking a supplementary question right at the start, which is: is George Osborne in any position to cut income taxes at all before the next election, given the slow progress of deficit reduction? The Mail this morning also reports that he will have £20 billion extra to “play with”, since the Office for Budget Responsibility “is this week expected to slash its borrowing forecasts for the year from £120billion to as little as £100billion”. (The OBR “is also expected to more than double its growth forecasts for the year from 0.6 per cent to 1.4 per cent”.) The paper surely doesn’t mean to suggest that £100 billion is a trifling sum. Steve Barclay, who supports Raab’s call in the Times, points out that “tax cuts have to be funded, and we have to not lose sight of overall debt levels of government as well as individuals”.
As Barclay suggests, the Chancellor will want to keep bearing down on borrowing when he makes his autumn statement in a few weeks: after all, deficit reduction is this Government’s economic raison d’etre, and Osborne will be sensitive to any suggestion that he has given up on it. But he is first and foremost a political strategist – as Help to Buy, which is pitched at private home owners as surely as Right to Buy is pitched at council home ones, should remind us. He will want to suggest that the economy is almost fully recovered (so you should gratefully vote Conservative), but not quite (so you shouldn’t risk voting Labour, and returning to a higher deficit). The statement will thus hold out some hope of income tax cuts, at the very least. Which returns us to the question: where should any such reductions fall?
In contrast to Raab, Robert Halfon has called on this site for a new 10p income tax rate to help poorer workers and, more recently, for raising the threshold for national insurance payments. One way of thinking about all this is to ponder the majorities of some of the MPs concerned. Raab’s majority in Esher and Walton is 18,593. Halfon’s in Harlow is 4,925. As one’s eye travels towards the midlands and north on the electoral map, so the majorities of Conservative MPs tend to come down – outside the rural areas at least. In the seats that the party must win and hold in 2013, the Warwickshire Norths and Bolton Wests, a smaller proportion of voters will pay the 40p rate than in the safer shire and sururban seats of the south. And as one travels north, the public sector tends gets bigger and wages lower (though, admittedly, costs do too).
In the medium-term, the 40p threshold should certainly be raised. But in the short-term, Osborne should focus “like a laser beam” on those marginal seats, in which income tax is far from being the only purse and wallet issue. Utility bills and fuel costs press hard both on poorer voters and on, to pick up the Times’s phrase, middle class ones. Average earnings last year were about £26,500, rather short of the 40p rate threshold. The Chancellor has already frozen fuel duty. He should now look to raise tax thresholds for poorer workers. The aim should be for no-one earning below the living wage to pay tax at all. It makes no sense for poorer voters to be paying tax in and getting tax credits out.