“We won’t oppose the household benefit cap [or] what [the Conservatives] brought forward in relation to restricting benefits and tax credits for three or more children… People don’t want us to do blanket opposition. They want us to actually be specific about what we are going to be challenging.”
So spoke Harriet Harman yesterday.
In 2020-21, reducing the benefit cap to £20,000 (£23,000) in London will raise £495m per annum. Removing the child element of tax credits and universal credit for children after the second will raise £1,365m pa. The other big cut to the welfare bill comes from reducing the income threshold at which tax credits begin to be cut from £6,420 to £3,850. This will raise, from the poorest working families, £3,440m per annum.
Taken together, as the Institute for Fiscal Studies has pointed out, the effect of the Budget tax and benefit reforms is heavily regressive. The lowest and second lowest earning tenths of the population will loss around 7% of their net income. But for the top three tenths of the population, the effects are neutral.
Blanket opposition to a Government given a fresh mandate amounts to no more than yelling that the electorate got it wrong. It’s not what sensible opposition looks like. But nor is accepting the Tories’ false dichotomy of deficit rises or benefit cuts.
Because Osborne’s Budget has left Labour plenty of room to frame its own dichotomy: are you for the wealthiest or for working families?
Raising the inheritance tax threshold will cost in 2020-21 £940m per annum.
The rationale for this measure in the Manifesto – that it would be “paid for by reducing the tax relief on pension contributions for people earning more than £150,000” – was jettisoned by Osborne in the Budget. It amounted to no more than this: the rewards for those who work hard and succeed will be diminished to increase those whose claim on them lies in an accident of birth.
The excuse instead advanced? “Rising house prices are contributing to nearly double the number of estates facing an inheritance tax bill by 2020-21.” But this serves him no better. Family house price gains are not liable to capital gains tax. So these measures increase the amount of wealth, tax free on accretion, which can be passed, tax free to those who have done nothing to deserve it. And the beneficiaries will be found exclusively in the wealthiest 10% of estates.
Another big Budget cost lies in cutting companies’ corporation tax bill by 10% to a mere 18% of their profits. This will amount in 2020-21 to £2,475m of tax foregone. But as the Coalition pointed out in March 2013, we already have a corporation tax rate which is “by far the lowest in the G7 and the joint lowest in the G20.” If you’re a shopkeeper and your prices are already the lowest, cutting them further looks like madness.
Here’s the explanation Osborne gave: “If we are to build a more productive economy, and our country is to live within its means, then we have to make this fundamental change.”
But in KPMG’s December 2014 only 10% of respondents saw favourable tax policies as the single factor having the most positive impact on our recovery. And the proposition that you need to cut corporation tax to increase investment into the UK is (to put it politely) unproven: the highest FDI into the UK in the last decade was 2005, more than double that in 2013 (the latest year for which figures have been reported) despite corporation tax rates being a quarter lower in 2013.
Another huge tax cut in the Budget is the increase in the personal allowance from £10,600 to £11,000. This will cost around £3bn (see here and here). Osborne spun this as a measure to secure that “we never ask the lowest paid in our society to pay income tax.” But as the IFS has pointed out 44% of adults already have incomes too low to pay income tax and “further increases are of most value to those in the middle and upper-middle of the income distribution.”
There is scope to benefit the lowest paid through our tax system – but those measures look like rises in the point at which earners pay national insurance contributions (£8,060) rather than income tax which is only paid by those higher up the earnings scale. This is the alternative Labour should be championing.
Add the cost of those three measures together – the rise in the inheritance tax threshold, the 10% cut in the corporation tax bill and the rise in the personal allowance – and you create £6.5bn of headroom per annum in 2020-21. The savings from lowering the benefit cap, cutting child tax credits and lowering the income tax credit threshold? £5.3bn.
Being in Government and wanting to be in Government do have this in common. They are both about crafting for the electorate a narrative around who you are and what you’re for. Of course, Harriet Harman is right: blanket opposition to a narrative the electorate has accepted is madness.
But so is failing to craft a strong alternative. Nick Clegg will readily testify to this. Remember his speech at the launch of the LibDem Manifesto: “We’ll give Tories heart and Labour a brain.” As I quipped at the time:
#LibDems – if only that bird knew where it was flying to.
— Jo Maugham QC (@JolyonMaugham) May 6, 2015
Labour mustn’t make that same mistake. Fortunately, the Budget leaves it plenty of room.
Jolyon Maugham QC is a tax barrister who blogs at waitingfortax.com.