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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Air pollution: 5 steps to vanquishing an invisible killer

A new report looks at the economics of air pollution. 

110, 150, 520... These chilling statistics are the number of deaths attributable to particulate air pollution for the cities of Southampton, Nottingham and Birmingham in 2010 respectively. Or how about 40,000 - that is the total number of UK deaths per year that are attributable the combined effects of particulate matter (PM2.5) and Nitrogen Oxides (NOx).

This situation sucks, to say the very least. But while there are no dramatic images to stir up action, these deaths are preventable and we know their cause. Road traffic is the worst culprit. Traffic is responsible for 80 per cent of NOx on high pollution roads, with diesel engines contributing the bulk of the problem.

Now a new report by ResPublica has compiled a list of ways that city councils around the UK can help. The report argues that: “The onus is on cities to create plans that can meet the health and economic challenge within a short time-frame, and identify what they need from national government to do so.”

This is a diplomatic way of saying that current government action on the subject does not go far enough – and that cities must help prod them into gear. That includes poking holes in the government’s proposed plans for new “Clean Air Zones”.

Here are just five of the ways the report suggests letting the light in and the pollution out:

1. Clean up the draft Clean Air Zones framework

Last October, the government set out its draft plans for new Clean Air Zones in the UK’s five most polluted cities, Birmingham, Derby, Leeds, Nottingham and Southampton (excluding London - where other plans are afoot). These zones will charge “polluting” vehicles to enter and can be implemented with varying levels of intensity, with three options that include cars and one that does not.

But the report argues that there is still too much potential for polluters to play dirty with the rules. Car-charging zones must be mandatory for all cities that breach the current EU standards, the report argues (not just the suggested five). Otherwise national operators who own fleets of vehicles could simply relocate outdated buses or taxis to places where they don’t have to pay.  

Different vehicles should fall under the same rules, the report added. Otherwise, taking your car rather than the bus could suddenly seem like the cost-saving option.

2. Vouchers to vouch-safe the project’s success

The government is exploring a scrappage scheme for diesel cars, to help get the worst and oldest polluting vehicles off the road. But as the report points out, blanket scrappage could simply put a whole load of new fossil-fuel cars on the road.

Instead, ResPublica suggests using the revenue from the Clean Air Zone charges, plus hiked vehicle registration fees, to create “Pollution Reduction Vouchers”.

Low-income households with older cars, that would be liable to charging, could then use the vouchers to help secure alternative transport, buy a new and compliant car, or retrofit their existing vehicle with new technology.

3. Extend Vehicle Excise Duty

Vehicle Excise Duty is currently only tiered by how much CO2 pollution a car creates for the first year. After that it becomes a flat rate for all cars under £40,000. The report suggests changing this so that the most polluting vehicles for CO2, NOx and PM2.5 continue to pay higher rates throughout their life span.

For ClientEarth CEO James Thornton, changes to vehicle excise duty are key to moving people onto cleaner modes of transport: “We need a network of clean air zones to keep the most polluting diesel vehicles from the most polluted parts of our towns and cities and incentives such as a targeted scrappage scheme and changes to vehicle excise duty to move people onto cleaner modes of transport.”

4. Repurposed car parks

You would think city bosses would want less cars in the centre of town. But while less cars is good news for oxygen-breathers, it is bad news for city budgets reliant on parking charges. But using car parks to tap into new revenue from property development and joint ventures could help cities reverse this thinking.

5. Prioritise public awareness

Charge zones can be understandably unpopular. In 2008, a referendum in Manchester defeated the idea of congestion charging. So a big effort is needed to raise public awareness of the health crisis our roads have caused. Metro mayors should outline pollution plans in their manifestos, the report suggests. And cities can take advantage of their existing assets. For example in London there are plans to use electronics in the Underground to update travellers on the air pollution levels.

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Change is already in the air. Southampton has used money from the Local Sustainable Travel Fund to run a successful messaging campaign. And in 2011 Nottingham City Council became the first city to implement a Workplace Parking levy – a scheme which has raised £35.3m to help extend its tram system, upgrade the station and purchase electric buses.

But many more “air necessities” are needed before we can forget about pollution’s worry and its strife.  

 

India Bourke is an environment writer and editorial assistant at the New Statesman.