A tax on aspiration?

The complex new student support system will result in eye-watering effective tax rates for many low-

Governments, like individuals, often like to believe their varying instincts and aspirations all fit comfortably together even when they don't. They prefer to try to keep these tensions under wraps and sometimes don't even like to admit them in private to themselves. And the coalition is a case in point.

One of its favourite claims is that, despite the fact that all sorts of welfare support is being removed from families on middle incomes, when it comes to the very poorest they are doing more than their predecessors. The pupil premium usually gets a mention here, followed by the expansion in student support for the most disadvantaged.

Another cherished claim is that punitive marginal tax rates for those struggling on modest incomes seeking to earn their way up will be reduced - a point  made with great passion by David Cameron in his 2009 Conservative party conference speech when he railed against an example of a 96 per cent tax rate hitting a single mother. At this point, the coalition tends to highlight the Olympian ambition of the Universal Credit and its effort to integrate benefits and tax credits and create a single, smoother means-test in our welfare system. 

A final claim is that it is right and proper to localise decision making about how to allocate scarce financial support – for instance through the decentralisation of council tax benefit.

Many would want to challenge each of these claims; but let’s leave that to one-side. What should be beyond dispute – though this is rarely recognised – is that these three agendas don’t make for comfortable bed fellows; indeed, they don’t really belong in the same room at all. Try and defend them individually if you so wish, but don’t pretend they add up to a coherent strategy.

The recent Child Benefit saga gave daylight to some of these tensions, demonstrating in vivid terms how poorly designed middle-class welfare retrenchment can generate nasty means-testing problems that then have to be mitigated.  As of next January the removal of Child Benefit from households with someone on over £50k will mean a new 50p or higher effective tax rate for these families if they have one child, and 60p for those with two kids. If the Budget hadn’t had so many other highlights the dragging of the 50p tax rate from the super-rich down the income scale would surely have received more notice.  

Now a new report by professor John Hills, perhaps the UK’s foremost authority on the welfare state (together with his LSE colleague Ben Richards), provides us with another dramatic case study of how different policy objectives combine to form a nasty cocktail. The perhaps unintended and unforeseen effect of a shift to greater private contribution in welfare (this time in the form of higher tuition fees), combined with efforts to protect the position of the very poorest (increased bursaries and grants aimed particularly at families with earnings under £17k), and a nod towards localism (universities run their own support system) is to create a new aspiration trap – truly eye-watering effective tax rates hitting families in low-to-middle income Britain sending a child to university this autumn.

This stems from the way in which the complex patchwork of student support gets withdrawn as household earnings rise. Some of the resulting ‘cliff edges’ soar high above those that triggered the Child Benefit row. 

To understand how this will actually play out in practice Professor Hills considers two families each with a child about to go to the University of Oxford. One family has earnings of £17k and the other £44k – so a difference in gross earnings of £27k.  After we take account of the impact of the overall tax and benefit system the difference between these families falls to £13,250. But once we factor in the additional impact of all the different elements of the new student support system the gap collapses to a grand total of £200 (yes, you read that right).

To restate: an initial difference in gross earnings of £27k between (broadly speaking) a low-income and middle-income family is completely wiped out. The withdrawal of student support, together with the tax and benefit system, creates an effective 99 per cent tax rate on earnings between £17k and £44k. There is no point being better off. And that’s before we consider some truly scary effective tax rates at particular points in the earnings distribution (see chart). I think it is fair to say that the coalition hasn’t fully got its head around the politics of this.

And don’t think this is just some quirky Oxford phenomenon, though the issue is most dramatic there (which, to be fair, is because the support on offer at Oxford for those with the very lowest incomes is most generous). Hills surveyed the support at our largest 52 universities representing 60% of all HE students and finds that it is common for small differences in parental earnings to lead to several thousand pounds less support. 

Now, we can ask questions about aspects of this. There will be some parents who couldn’t care less about the financial position of their 18 year old, so they won't view a drop in support as any sort of hit on the family budget. And the report significantly understates the extent to which the withdrawal of some financial support, like cash bursaries and maintenance grants, may feel more like an effective 'tax rise' on the family than others, such as the removal of fee discounts (which may seem like a problem for the student tomorrow rather than the family today). Despite this the overall argument is strong.

The usually understated Hills concludes that despite the towering rhetoric about the what the universal credit will achieve, some parts of government are moving in “precisely the opposite direction”,  giving rise to new poverty traps. “It looks as if we will see a lot more of this in the future.  Already councils have each been told to work out their own way of making savings on Council Tax Benefit, which could result in them withdrawing benefit faster, adding to the poverty trap – but with rates and rules varying across local authority boundaries.  With budgets under pressure, it’s an obvious reaction to withdraw services from those with higher incomes, while keeping means-tested support for the poor. But what may seem a reasonable response to fiscal constraints while trying to protect the poorest in one sphere may overlap chaotically with other attempts to do the same thing”.

If this new twist to the student finance reforms sparks to life, as its impact on household budgets becomes clearer, it will send a shiver down the spine of leading members of the coalition. At the time they took the decision to bring in the new funding system they knew, of course, they were in for some choppy politics and that those on middle and high incomes would take a hit. But I very much doubt they grasped that it would lead to what many of them would consider to be totalitarian tax rates being imposed on families in the so-called striving classes whose kids are aiming high.

Students walk under the Bridge of Sighs along New College Lane on March 22, 2012 in Oxford. Photograph: Getty Images.

Gavin Kelly is a former adviser to Downing Street and the Treasury. He tweets @GavinJKelly1.

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Keir Starmer: “I don’t think anybody should underestimate the risks of getting Brexit wrong”

The former director of public prosecutions is now heading up Labour’s response to Brexit. But can he succeed in holding the Tories’ feet to the fire?

Early in his new role as shadow Brexit secretary, Keir Starmer was accused of being a “second-rate lawyer”. The gibe, in a Commons debate, came from none other than Iain Duncan Smith. Starmer was director of public prosecutions for five years and later stood for parliament in 2015. No novice, then. Within a few days, Duncan Smith stood again in the House, this time to offer his apologies.

A fortnight later, I met Starmer at his quiet office in Westminster. He was sitting at a table piled with papers, in an office that, a discreet family photo aside, was unadorned. He had just got back from a whirlwind trip to Brussels, with many more such visits planned in the weeks ahead.

Starmer returned to the shadow cabinet after Jeremy Corbyn’s second leadership election victory last month. “The series of agreements we will have to reach in the next few years is probably the most important and complex we’ve had to reach since the Second World War,” he told me.

Starmer, who is 54, took his time entering politics. Born in 1962, he grew up in a Labour-supporting household in Surrey – his father was a toolmaker and his mother a nurse – and was named after Keir Hardie. After studying law at Leeds University, he practised as a human rights barrister and became a QC in 2002. In 2008, after varied legal work that included defending environmental campaigners in the McLibel case, he became the head of the Crown Prosecution Service for England and Wales as well as director of public prosecutions, positions he held until 2013.

When in 2015 Starmer ran for a seat in parliament to represent Holborn and St Pancras in London, it was assumed he would soon be putting his expertise to use in government. Instead, after Labour’s election defeat under Ed Miliband, he served as one of Corbyn’s junior shadow ministers, but resigned after the EU referendum in June.

Now, he is back on the opposition front bench and his forensic scrutiny of government policy is already unsettling the Conservatives. Philippe Sands, the law professor who worked with him on Croatia’s genocide lawsuit against Serbia, says he couldn’t think of anyone better to take on the Brexiteers in parliament. “It’s apparent that the government is rather scared of him,” Sands said. This is because Starmer is much more capable of teasing out the legal consequences of Brexit than the average Brexit-supporting Tory MP. Sands added: “It would be fun to watch if the stakes weren’t so very high.”

Starmer is a serious man and refused to be drawn on the character of his opponents. Instead, speaking slowly, as if weighing every word, he spelled out to me the damage they could cause. “The worst scenario is the government being unable to reach any meaningful agreement with the EU and [the UK] crashing out in March 2019 on no terms, with no transitional arrangement.” The result could be an economic downturn and job losses: “I don’t think anybody should underestimate the risks of getting this wrong.”

If Starmer seems pessimistic, it is because he believes time is short and progress has been slow. Since the referendum, disgruntled MPs have focused their attention on the final Brexit settlement. Yet if, as he argues, the starting position for our negotiations with the EU is wrong, the damage will have been done. MPs faced with a bad deal must either approve it or “risk the UK exiting the EU without a deal at all”.

It is this conviction that is driving his frantic schedule now. Starmer’s first month in the job is packed with meetings - with the representatives of the devolved nations, business leaders and his European counterparts.

He has also become a familiar face at the dispatch box. Having secured a commitment from David Davis, the minister for Brexit, that there will be transparent debate – “the words matter” – he is now demanding that plans to be published in January 2017 at the earliest, and that MPs will have a vote at this stage.

In his eyes, it will be hard for the Prime Minister, Theresa May, to resist, because devolved parliaments and the European parliament will almost certainly be having a say: “The idea there will be a vote in the devolved administrations but not in Westminster only needs to be stated to see it’s unacceptable.”

In Europe, Starmer said, the view is already that Britain is heading for the cliff edge. It was May’s pledge, that after Brexit the UK would not “return to the jurisdiction of the European Court of Justice”, which raised alarm. And among voters, there is “increasing anxiety” about the direction in which the UK is moving, he said. Even Tory voters are writing to him.

In the Labour Party, which is putting itself back together again after the summer’s failed coup, immigration remains the most vexed issue. Starmer told me that Labour had “earned a reputation for not listening” on the issue. Speaking on The Andrew Marr Show shortly after becoming shadow Brexit secretary, he said immigration was too high and ought to be reduced. But later that same day, Diane Abbott, a shadow cabinet colleague, contradicted him, publicly criticising immigration targets.

Starmer believes there is a bigger picture to consider when it comes to Britain’s Brexit negotiations. Take national security, where he warns that there are “significant risks” if communications break down between the UK and the EU. “Part of the negotiations must be ensuring we have the same level of co-operation on criminal justice, counterterrorism, data-sharing,” he said.

Crucially, in a Labour Party where many experienced politicians are backbench dissenters, he wants to reach out to MPs outside the shadow cabinet. “We have to work as Team Labour,” he stressed.

It’s a convincing rallying cry. But for some MPs, he represents more than that: a lone moderate in what can be seen as a far-left leadership cabal. Does he have any ambitions to lead Labour? “Having had two leadership elections in the space of 12 months, the last thing we need at the moment is discussion of the leadership of the Labour Party.” He has agreed to serve in the shadow cabinet, and is determined to stay there.

Starmer has found his purpose in opposition. “If we think things aren’t going right, we’ve got to call it out early and loudly. The worst situation is that we arrive at March 2019 with the wrong outcome. By then, it will be too late.”

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines. 

This article first appeared in the 27 October 2016 issue of the New Statesman, American Rage