Tax and Spend

Here's a thoughtful analysis of last week's budget - written by Martin Kettle who's a regular columnist with The Guardian newspaper.

I get bored very quickly with all the 'yah boo' politics which accompany these big parliamentary occasions - they are more Punch and Judy than serious political debate about how much to tax - and how much to spend.

The coalition government introduced some progressive measures in the budget - such as raising personal and taking more low paid workers out of tax altogether - for which it deserves credit.

Whether it's tax raising measures work - at the other end of the spectrum - remains to be seen, but time will tell.

But what doesn't ring true to me is the Labour party's insistence on opposing every change where one group or another lose out - paying child benefit to higher paid workers, for example - or freezing higher rate personal allowances for pensioners. 

Because it's all about defending vested interests of one kind or another - demanding that everyone holds on to what they already have - in fact the exact opposite of doing something serious about the 'haves and have nots.'

So all the 'Grab a Granny' hysteria cuts no ice with me - because not every granny needs saving.      

Budget 2012: A budget for the rich or the poor?

It's too early to sayWhether this is a budget for millionaires, as Ed Miliband says, or for the millions, will depend on the tax-dodging super-rich

Which of the politicians has got it right? Is it George Osborne, who boldly asserted while cutting income taxes on the rich that his budget means the richest will actually pay more? Or Ed Miliband, claiming that the coalition has bottled a fundamental fairness test and proved that Britain is run by the same old Tories? Or even the ever optimistic Liberal Democrat cabinet minister who insisted yesterday that, in spite of all the evidence to the contrary, this may in fact prove to be a historic budget?

They can't all be true at the same time. But perhaps, once you step back from the immediate battlelines to where most people live, they can be in part. For this was a budget in which more than one thing was true at the same time. With little scope for major course changes following November's grim retightening of the economic forecasts, this was a budget for shades of grey, tricky dilemmas and compromise outcomes. Addicts of the Danish television series in which a coalition prime minister is constantly trapped between principle and practicality will recognise the situation. This budget was the British coalition's Borgen moment.

No subject in modern politics is more difficult to get right than personal taxation. Yet none is more essential for the credibility of government and political parties. Almost every voter has similar dilemmas about tax – willing in principle to pay up for the common good but unwilling in practice to pay more than seems reasonable and fair. Political parties juggle these balls endlessly. There is no ideal or permanent balance. It all depends on the circumstances.

The financial crisis of 2008 has transformed the politics of personal taxation, and we are still grappling with the consequences four years later. The 2012 budget is part of that unfolding process. Will the tolerance of, or even enthusiasm for, higher rates endure? History is no guide. The individual and collective mentality of voters in 2012 is very different from that of our great-grandparents.

It is important to understand the history of tax politics all the same. In the second world war and shortly afterwards, the basic rate of income tax – not the top rate as now – was the equivalent of 50p in the pound. By the 1970s oil crisis, the basic rate was still 38.75%, nearly twice as high as now. The oil crisis triggered big cuts in personal taxation, and large rises in indirect taxes.

From then until the financial crisis of 2008, no government dared to do anything except lower income tax rates, while loading the rest of the tax burden on to an ever more ingenious range of less headline-grabbing measures. When Gordon Brown lowered the basic rate of income tax to 20p in the pound in 2007, rates had not been so low since 1930, the year before the depression. Today's politicians are all children of that timorous era.

Labour's decision to reintroduce a new 50p band on incomes over £150,000 from 2010 was an act of historic defiance against the low-tax political culture bequeathed by Margaret Thatcher's chancellors. But it was the product of exceptional crisis. No one can say with any confidence that higher tax rates could become the new normal, whatever the polls suggest.

Osborne's decision to cut the rate to 45p reflects a very common view, not just in this country and not just in his party – plenty of Labour people share it – that the higher rate is electorally unsustainable, and is in any case not a proof of virtue. It is silly, though not uncommon, to pretend there is no dilemma here. But Osborne also claims to be responding to the lower than expected yield, as detailed in the Treasury's fascinating budget document on the subject published on Wednesday. As Wednesday's speech and document both make clear, the problem with higher rate personal taxation, as perceived by ministers, is not so much that it is unpopular – because it isn't, except among those who are subject to it. The problem is that the rich can avoid paying.

It is easy, as Miliband did, to denounce the chancellor for the higher rate cut. Most of us, after all, have no option but to pay our taxes. The vast majority of us who are on PAYE would be prosecuted if we opted not to pay. The rich, and those on self-assessment, live in a wholly different world. If they don't pay, the law doesn't come after them, as it would the rest of us. In their case the law is changed to reflect the fact that they won't pay up.

Yet it would be a mistake to conclude that Osborne's decisions on personal taxation represent nothing but an ideological reversion to the Thatcherite Tory norm. There are three reasons for saying this. The first is that Osborne, while cutting the higher rate, has nevertheless retained it. Anyone who wants personal tax rates to more closely follow the contours of Britain's patterns of personal income should welcome its retention. The pity is simply that there are not more bands.

The second thing to note, and also to welcome, is that the new taxes on wealth – in effect a tycoon tax on tax-dodgers – mean that enforcement is now being taken more seriously than before. Not as seriously as it should be, perhaps, and not with a guaranteed successful outcome either, but the movement is all in the right direction. The movement reflects the necessity for the state of getting more income from the tax-dodging super-rich. But, just as it has become politically possible to debate income tax levels in a more grown-up way since 2008, so now it has become politically possible to debate enforcement in a similarly rational way. This is progress.

The final thing to acknowledge is that the increases in personal allowances for the working poor and middle class do not square with the conceit that this is simply a budget for millionaires, not the millions. The Liberal Democrats extracted a price for agreeing to the higher rate cut. Whether the deal ends up, over time, as a net giveaway to the rich or to the less well-off is greatly disputed and will not become clear until the scale of tax enforcement is known. This may not do the Lib Dems much good politically, but it is a classic coalition trade-off all the same.

The 2012 budget has not rewritten the political script for the second half of the parliament. It is neither a ringingly progressive nor a ringingly reactionary event. Its importance will depend on whether the measures to compel the rich to pay the taxes they currently dodge succeed. In this regard, at least, the politicians and the public are all on the same side for now.