‘Tax cuts in tough times’ – what I said at the Resolution Foundation

by Stephen Tall on December 2, 2014

stephen tall res fdnI spoke yesterday (alongside The Times’s Tim Montgomerie and The Guardian’s Polly Toynbee) at the Resolution Foundation event, Tax cuts in tough times.

This marked the publication of their new paper, Missing the target: tax cuts and low to middle income Britain – I’ve written about that over at LibDemVoice here. They’re highly critical — rightly — of all the parties for proposing tax-cuts which don’t do very much for the least well-off but do a whole lot more for the better-off.

Here’s the notes I spoke from…

First, many thanks to the Resolution Foundation for inviting me along, to put the Lib Dem perspective. I’m making the most of these gigs before the election.

I’ll start by defending the Lib Dems’ tax policy… to a point. Raising the personal allowance is at least a better focus than the old penny off income tax card the parties used to play. That we’re here talking about the impact of tax-cuts on the poorest is testament to the welcome shift in how we talk about tax-cuts.

However, I think my party has now got stuck in a rut. I think it’s understandable we’re there. The Lib Dems pushed a policy – raising the threshold – which, to begin with at any rate, was largely progressive. It also had the added advantage of simplicity – something which couldn’t be said for tax-credits, introduced with best of intentions, but which one-third of beneficiaries didn’t take up.

There’s a further principled reason I’ll add. I do think it is quite wrong to tax people working at or below the minimum wage. It also strikes me as utterly inefficient, taking tax from some of the poorest in our society with one hand, giving it back in benefits with the other: Robbing Peter to pay Peter (minus an overhead charge to Paul), a boondoggle state redistribution.

So there were good reasons for the policy. It’s one the Lib Dems have been very protective of, especially as the Tories try to claim it as their own. That’s probably part of the reason my party’s decided to go still further in its next manifesto and up it to £12.5k, in line with the minimum wage. To double down on the deal, to try and nail it as a Lib Dem tax-cut.

But the Resolution Foundation is right to focus on the distributional impact – we should be looking at how we can best benefit the least well-off.

Resolution has deliberately stuck to personal taxation in their report but I’m sorry they didn’t find space to include the most progressive tax-cut of all – at least according to a former Treasury official, one Damien McBride, who said pushed a policy which, he said, “Compared to other options, [has] a hugely disproportionate benefit for pensioners and low-income families with kids”. The policy? Cutting the VAT on pet food to 5 per cent. He records that his then-fellow advisers Eds Balls and Miliband “looked at me as if I was an idiot”. They didn’t take his advice. I’ve no idea how it would have played with White Van Dan.

Back to Resolution’s recommendations. I applaud their focus on raising the National Insurance threshold. During the party’s manifesto-making process I and others pushed this idea as a better option than raising the income tax allowance. In fact the last time I spoke alongside Gavin Kelly was at a Lib Dem conference fringe meeting. I asked the audience the question: “wouldn’t it be better first to raise the level at which workers start to pay national insurance contributions, currently just under £8k?” and got a spontaneous round of applause from the audience (I don’t get many so it stuck in my mind).

The party leadership half-listened and a few months ago Danny Alexander announced it as a further tax-cutting aim… once the personal allowance had reached £12.5k.
Which is fine, except we know the public finances just won’t allow for an additional £9bn largesse. Both policies are laudable but the priorities are entirely the wrong way round. As Resolution pithily puts it: “[Lib Dem policy] seems to be to reduce taxes for everyone in the country earning between £10,500 and £121,000 before, at some later date, turning to help those earning as little as £8,000.”

I also welcome the clarity Resolution are bringing to the discussion of the interaction between tax-cuts and Universal Credit. One of the other arguments the Lib Dems have pushed, which has always had merit in my eyes, is that raising the personal allowance does boost work incentives: those who take on extra low-paid work get to keep it all. The fact they’ll instead, according to this research, be subject to a marginal tax-rate of 65% blows that argument out of the water. And speaking of water, even Myleene Klasse might accept that’s less fair than an annual levy on owners of £2m properties.

Resolution’s proposals of revenue-neutral increases in work allowances under Universal Credit and the National Insurance allowance is one I welcome. But as they admit there will be losers: better-off losers. Here’s a question, then: are the political parties ready to make that case? And are we, the electorate, ready for them to make it?

The evidence suggests not. Why do I say that? Well, here’s two reasons…

Politicians protect the interests of those who’ll vote: One group which has definitely gained over the last five years and will continue to gain is the retired. Spending on the state pension – as a result of the triple lock – will have increased by nearly 20% in real terms between 2010–11 and 2017–18. That’s even more expensive when you consider there will be two million more pensioners at the end of this decade than the start. So, on one level, the Tories are right: welfare spending is going up. The impact of the current cuts is to redistribute on a large scale to pensioners from some of the most vulnerable young people who rely on benefits. Is that right?

Politicians are desperate to avoid levelling with the public: To quote the IFS: “None of the parties has so far identified more than a fraction of the measures they would use to hit their deficit targets.” When I read that recent statement, it gave me a sense of deja vu. In April 2010, the IFS published its Election Briefing, highlighting that no party had yet set out anything like enough public spending cuts to meet their objectives of cutting the deficit. The Lib Dems had produced the most detailed measures, yet these totalled only 25 per cent of the cuts needed; the Tories had identified 17 per cent, and Labour just 13 per cent. The finding attracted little scrutiny, with the media fixated instead on the personality-fest of the televised leaders’ debates.

Does anyone honestly think it’ll be that much different in 2015? Who will ask the parties to spell out the impact of their spending plans on public services so voters can come to an informed decision? Journalists like their politics bite-size and entertaining: hard facts are a turn-off.

It is, in any case, a bit too easy to blame the media or MPs: we voters have to take our share of responsibility. We say we want honest politicians, folk who’ll tell us straight how it is. Yet we don’t often reward such honesty. If we did there would be a few more MPs queuing up to tell us that

(1) we need young, skilled, productive immigrants to staff key services like the NHS as well as to offset the financial burden of our ageing population, and

(2) running the nation’s finances is nothing like running a household budget, so eliminating the deficit within an artificial timescale like a five-year parliament is a pointless brag.

Truth is, there aren’t many options available. After 2015 one of four things will have to happen. Either (1) big, additional cuts to spending on public services; (2) big cuts to social security; (3) delaying deficit reduction to postpone the problem; or (4) raising taxes – and not just on the rich because there simply aren’t enough of them. Most likely it’ll be a pick ‘n mix of all four. I think we should level with the voters about what that means. But which party’s prepared to go first?

I am aware, though, it’s easy for me – unelected, not standing for election – to pontificate that “we should level with the voters”. To give Nick Clegg his due, he did just that in his conference media interviews. Cue newspaper headlines such as “Clegg will send taxes soaring should Lib Dems be elected”. Compare that with the eulogistic coverage Cameron’s fantasy finance tax-cuts attracted and it’s hard to see where the incentive is for politicians looking to get elected to level with the voters.

“We need politicians who’ll actually listen to us,” goes up the popular cry. But we already have them. At the next election, every prospective MP – whether their rosette is blue, gold, red or purple – will happily talk about their plans to improve services while cutting taxes for people just like you. They’ll tell you that because it’s what you want to hear. Caveat emptor. Then, after the election, whoever finds themselves in power will have to get real. That, it seems, is how we like to do politics. Blame the politicians if you like, but the cliché is true: we get the politicians we deserve.

PS: if any of the above sounds familiar, bits of it are borrowed from these three posts, the first two by me…

How should we share the gain and the pain in the next Parliament? (October 16, 2014)

Austerity and honesty. Will any of the parties level with the voters about what the post-2015 cuts will look like? (July 30, 2014)

Balancing the books: some unpalatable choices by the IFS’s Paul Johnson on LibDemVoice (October 6, 2014)