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 (twitter.com/#!/jamestplunkett) leads the Foundation's Commission on Living standards.

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Labour's establishment suspects a Momentum conspiracy - they're right

Bernie Sanders-style organisers are determined to rewire the party's machine.  

If you wanted to understand the basic dynamics of this year’s Labour leadership contest, Brighton and Hove District Labour Party is a good microcosm. On Saturday 9 July, a day before Angela Eagle was to announce her leadership bid, hundreds of members flooded into its AGM. Despite the room having a capacity of over 250, the meeting had to be held in three batches, with members forming an orderly queue. The result of the massive turnout was clear in political terms – pro-Corbyn candidates won every position on the local executive committee. 

Many in the room hailed the turnout and the result. But others claimed that some in the crowd had engaged in abuse and harassment.The national party decided that, rather than first investigate individuals, it would suspend Brighton and Hove. Add this to the national ban on local meetings and events during the leadership election, and it is easy to see why Labour seems to have an uneasy relationship with mass politics. To put it a less neutral way, the party machine is in a state of open warfare against Corbyn and his supporters.

Brighton and Hove illustrates how local activists have continued to organise – in an even more innovative and effective way than before. On Thursday 21 July, the week following the CLP’s suspension, the local Momentum group organised a mass meeting. More than 200 people showed up, with the mood defiant and pumped up.  Rather than listen to speeches, the room then became a road test for a new "campaign meetup", a more modestly titled version of the "barnstorms" used by the Bernie Sanders campaign. Activists broke up into small groups to discuss the strategy of the campaign and then even smaller groups to organise action on a very local level. By the end of the night, 20 phonebanking sessions had been planned at a branch level over the following week. 

In the past, organising inside the Labour Party was seen as a slightly cloak and dagger affair. When the Labour Party bureaucracy expelled leftwing activists in past decades, many on went further underground, organising in semi-secrecy. Now, Momentum is doing the exact opposite. 

The emphasis of the Corbyn campaign is on making its strategy, volunteer hubs and events listings as open and accessible as possible. Interactive maps will allow local activists to advertise hundreds of events, and then contact people in their area. When they gather to phonebank in they will be using a custom-built web app which will enable tens of thousands of callers to ring hundreds of thousands of numbers, from wherever they are.

As Momentum has learned to its cost, there is a trade-off between a campaign’s openness and its ability to stage manage events. But in the new politics of the Labour party, in which both the numbers of interested people and the capacity to connect with them directly are increasing exponentially, there is simply no contest. In order to win the next general election, Labour will have to master these tactics on a much bigger scale. The leadership election is the road test. 

Even many moderates seem to accept that the days of simply triangulating towards the centre and getting cozy with the Murdoch press are over. Labour needs to reach people and communities directly with an ambitious digital strategy and an army of self-organising activists. It is this kind of mass politics that delivered a "no" vote in Greece’s referendum on the terms of the Eurozone bailout last summer – defying pretty much the whole of the media, business and political establishment. 

The problem for Corbyn's challenger, Owen Smith, is that many of his backers have an open problem with this type of mass politics. Rather than investigate allegations of abuse, they have supported the suspension of CLPs. Rather than seeing the heightened emotions that come with mass mobilisations as side-effects which needs to be controlled, they have sought to joins unconnected acts of harassment, in order to smear Jeremy Corbyn. The MP Ben Bradshaw has even seemed to accuse Momentum of organising a conspiracy to physically attack Labour MPs.

The real conspiracy is much bigger than that. Hundreds of thousands of people are arriving, enthusiastic and determined, into the Labour party. These people, and their ability to convince the communities of which they are a part, threaten Britain’s political equilibrium, both the Conservatives and the Labour establishment. When the greatest hope for Labour becomes your greatest nightmare, you have good call to feel alarmed.