These tax cut whispers are about to get louder

Bizarrely, abolishing the 50p rate remains top of the Chancellor's list.

With summer over, the skies are darkening in more ways than one. Economic forecasts, previously strong for this autumn, have long been heading south. Last week sharpened the sense of impending crisis. The FTSE has been shaken more violently than at any time since the paroxysms of early 2009. On Wednesday, unemployment stats took their biggest quarter-on-quarter leap since March 2009. The US and German economies are flat-lining.

Whatever your favoured explanation for our worsening economic plight, one thing is increasingly clear: the UK economy is propped up on pillows, in desperate need of a shot in the arm. It may not be fashionable to say it, but that shot needs to involve a pickup in consumption and domestic consumer confidence. Yes, that jars with the consensus narrative about the need to rebalance our economy towards exports and investment, away from domestic consumption. But in times like these there's no escape from the cold hard reality: household consumption still makes up two thirds of UK GDP. Whatever our need for medium-term rebalancing, domestic consumption will play the star role in either lifting the UK economy out of danger or pushing it over the edge.

You only have to look at the periods following previous recessions to see how far we are now wavering from the 'normal' path to recovery. Figure 2 in this recent blog post compares the four major recessions that have hit the UK in recent decades, looking at the path of household consumption from their onset. In each case, it was at around this point - 10 quarters on from the start of contraction - that the spark of consumer spending re-ignited. As would be expected following a "balance sheet recession"', our current path to recovery looks decidedly different. Today, consumer spending is not a rocket booster but a millstone.

This economic misery is being driven by the coincidence of two things: households are seeing their disposable incomes fall steadily in real terms at the same time as they continue to carry a massive burden of debt. That leaves them facing a stark choice. Either falling incomes mean less spending or households will have to eat into their savings or take on yet more debt. (New research from the Resolution Foundation out this week will confirm the startlingly poor savings position of Britain's low-to-middle incomes households and reinforces just how vulnerable millions of households are to any future rise in interest rates). Only a pick-up in real disposable incomes will gradually free us from this bind.

So how is this harsh economic reality set to play out in our politics? Amidst all the unpredictability, we can be confident about one thing: in the coming months the current Westminster chatter about tax cuts will become louder and more volatile. Expect arguments over timing, over who to target, the potential impact on consumer confidence and spending, and perhaps loudest of all, over how any cut could be paid for.

In macroeconomic terms, of course, any plausible move on tax will pale in comparison to the decisions the Bank of England makes on further quantitative easing. But in the context of a long squeeze on living standards, all political parties have long realised that the lure of a targeted reduction in taxes for at least some groups would eventually become irresistible. Deteriorating economic news may expedite this.

So what's on the agenda? Bizarrely, given the economic context, the abolition of the 50p rate remains top of the chancellor's list, with a review set to report in the autumn as cover for a move. Even leaving aside the glaring question of equity, there will be grave doubts about the economic wisdom of trying to stimulate the economy - however modestly - with a tax cut for the very richest. Whatever you think of the 50p rate (and polls show that the public think quite a lot of it) cutting taxes for those at the very top is more likely to see money flowing into high-end savings accounts and central London property. By contrast, tax cuts for the bottom half of the working population - in particular those low income households who are now spending every penny they earn - are far more likely to help the high street.

Of course, the chancellor must know full well that, on its own, a tax cut for the richest 1 per cent would be the final nail in the coffin of his claim that "we're all in this together". If that is Labour's hope, there is a good chance they will be disappointed. It's no surprise, then, to see recent Lib Dem briefings talking up the idea of reintroducing the 10p rate of tax, backed by a clear message that they want to support those struggling on low and middle incomes.

Such a move may seem far-fetched but it has a powerful political logic. Many Labour backbenchers would retch at the prospect of Tories jeering from across the benches, hollering that they have put right the injustice of Brown's 10p abolition. The Lib Dems would of course revel at the prospect of claiming that it is they who have dragged the government's tax strategy in a more progressive direction.

Could it prove possible to make any sort of move on both 10p and 50p? That would be a significant fiscal stretch. It will depend in large part on the state of the economy; though paradoxically, if things suddently get worse, measures that currently sound implausible could gain a new respectability. It will also depend on whether the Coalition is willing to raise compensating tax revenue in a way that doesn't tilt the economy downwards. For that reason it's significant that some Lib Dems are now briefing aggressively in favour of a wealth tax (as well as green taxes) - and that prominent Tories are pitching in their penny's worth, from outright hostility from some cabinet ministers to more thoughtful support from commentators.

Of course, as the debate heats up, other options will also rise to the surface. For all its economic and political superiority over a tax-cut for the very richest, there are reasons to question the reintroduction of the 10p rate. Some will argue, for example, that reversing cuts to tax credits would better target money to those most in need. The fiscal position, combined with an unwillingness to raise other taxes, may in the end scupper any move in the near future in any case. But wherever the debate ends up, one thing is already becoming clear as the summer wanes: this game of Westminster whispers is set to get a whole lot louder.

Gavin Kelly is Chief Executive of the Resolution Foundation. James Plunkett (!/jamestplunkett) leads the Foundation's Commission on Living standards.

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The future of policing is still at risk even after George Osborne's U-Turn

The police have avoided the worst, but crime is changing and they cannot stand still. 

We will have to wait for the unofficial briefings and the ministerial memoirs to understand what role the tragic events in Paris had on the Chancellor’s decision to sustain the police budget in cash terms and increase it overall by the end of the parliament.  Higher projected tax revenues gave the Chancellor a surprising degree of fiscal flexibility, but the atrocities in Paris certainly pushed questions of policing and security to the top of the political agenda. For a police service expecting anything from a 20 to a 30 per cent cut in funding, fears reinforced by the apparent hard line the Chancellor took over the weekend, this reprieve is an almighty relief.  

So, what was announced?  The overall police budget will be protected in real terms (£900 million more in cash terms) up to 2019/20 with the following important caveats.  First, central government grant to forces will be reduced in cash terms by 2019/20, but forces will be able to bid into a new transformation fund designed to finance moves such as greater collaboration between forces.  In other words there is a cash frozen budget (given important assumptions about council tax) eaten away by inflation and therefore requiring further efficiencies and service redesign.

Second, the flat cash budget for forces assumes increases in the police element of the council tax. Here, there is an interesting new flexibility for Police and Crime Commissioners.  One interpretation is that instead of precept increases being capped at 2%, they will be capped at £12 million, although we need further detail to be certain.  This may mean that forces which currently raise relatively small cash amounts from their precept will be able to raise considerably more if Police and Crime Commissioners have the courage to put up taxes.  

With those caveats, however, this is clearly a much better deal for policing than most commentators (myself included) predicted.  There will be less pressure to reduce officer numbers. Neighbourhood policing, previously under real threat, is likely to remain an important component of the policing model in England and Wales.  This is good news.

However, the police service should not use this financial reprieve as an excuse to duck important reforms.  The reforms that the police have already planned should continue, with any savings reinvested in an improved and more effective service.

It would be a retrograde step for candidates in the 2016 PCC elections to start pledging (as I am certain many will) to ‘protect officer numbers’.  We still need to rebalance the police workforce.   We need more staff with the kind of digital skills required to tackle cybercrime.  We need more crime analysts to help deploy police resources more effectively.  Blanket commitments to maintain officer numbers will get in the way of important reforms.

The argument for inter-force collaboration and, indeed, force mergers does not go away. The new top sliced transformation fund is designed in part to facilitate collaboration, but the fact remains that a 43 force structure no longer makes sense in operational or financial terms.

The police still have to adapt to a changing world. Falling levels of traditional crime and the explosion in online crime, particularly fraud and hacking, means we need an entirely different kind of police service.  Many of the pressures the police experience from non-crime demand will not go away. Big cuts to local government funding and the wider criminal justice system mean we need to reorganise the public service frontline to deal with problems such as high reoffending rates, child safeguarding and rising levels of mental illness.

Before yesterday I thought policing faced an existential moment and I stand by that. While the service has now secured significant financial breathing space, it still needs to adapt to an increasingly complex world. 

Rick Muir is director of the Police Foundation