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.

Photo: Justin Tallis/Getty Images
Show Hide image

If Jeremy Corbyn does win, the Greens should shut up shop

If self-described socialists continue to organise outside of the Labour party, they risk depriving the left's main outlet of both talent and voters, warns Michael Chessum.

It could all be rash complacency, but for much of left thoughts have already begun to focus on the reality of a Corbyn-led Labour Party. In the Labour left, the air is swirling with new projects – to back Corbyn up as leader, to organise the membership against parts of the PLP if necessary, to bring Labour into social movements and social movements into Labour. But outside Labour, too, the wider left is waking up to discover the entirely different reality that could be posed by a sharp left turn in leadership. In the Green Party, and especially among those on the left of the party, there is increasing pressure to find a formal working arrangement with Corbyn’s Labour, much of which is reflected in Caroline Lucas’s open letter in the Independent last week. An electoral pact is, apparently, already on the table.

Lucas’s call for an electoral pact is a pretty honest gesture, and will not be entirely uncontroversial in her own party; it is certainly worth much more than, as some more cynical onlookers in Labour have put it, “please don’t run against me in Brighton Pavillion”. It could also be significant in terms of electoral arithmetic: after boundary changes, and in any tight election, Labour will need the 3.8 per cent of the vote that the Greens got at the last election.  But while Lucas and other leftwingers in the Green Party are at least acknowledging the issue, there is a danger that they will avoid a more fundamental question: if Corbyn wins, does it really make sense for self-described socialists in the Green Party to continue a separate existence outside of Labour at all?

Corbyn represents the undeniable arrival of a wider political trend. Across Europe, democratic socialism is undergoing a split: yesterday’s “realists”, who argue for an accommodation with neo-liberal economics and the austerity politics that follows it like clockwork, are on one side; on the other is an assortment of socialists and social democrats who argue for something else. Mass anti-austerity politics has not been a one-party affair in the UK: it was built from the ground up by students, workers and community campaigns; it was road-tested in Scotland; and it has been formulated into policy from a variety of angles, as well as by the Corbyn campaign itself. But now, in the face of the realities presented by five more years in opposition, the vital political expression of the anti-austerity movement seems to have come to fruition in the Labour Party.

This fact will leave one of the largest sections of the organised left – the Green left – disorientated and unsure of what to do. Some socialists and leftwingers in the Green Party are there on the basis of a genuine conviction that the green movement, rather than the labour movement, is their political home. But for the vast bulk of those drawn to the Green left – many of them freshly recruited from recent social movements, others exiles from Labour under Blair – the purpose of the Green left is premised largely on the idea that a credible party-political alternative was needed, and that an anti-austerity surge would be impossible inside the Labour Party. This premise is now ebbing away.

The race is now on for the true believers to convince their periphery of the virtues of remaining in the Green Party after Corbyn wins. Many may yet be convinced, and the Labour left should not be complacent about recruiting a sudden tide of departing Greens.  But for those who joined because they wanted to intervene into mainstream politics from the left, there should be no doubt as to where the big fights will now happen, and where those committed to having them should go.

The incorporation of elements of the radical left’s core constituency into the Greens was always a peculiarity of recent British history. Had it become a sustainable arrangement and grown into a faint British Syriza, it would have made the Green Party of England and Wales unique in Europe, where ecologist and green parties usually sit distinctly and uneasily next to their far-left counterparts.

Much of the uneasiness that characterises the relationship between green parties and radical left groupings in other countries is about ideas, but much of it is also about tribalism – the simple fact that they have separate organisations which need to be different, and which breed differences in approach as often as they reflect them. If either the Green left or the Labour left are not careful, this tribalism will replicate itself, weakening everyone and dividing the left for no particularly coherent political reason.

That is why it is so significant that figures as senior as Caroline Lucas are already making overtures to Corbyn’s Labour. However, there is a danger that behind the positive gestures lie a serious of less friendly assumptions: that any electoral pact is temporary, is designed to build and promote the existence of the two separate parties, and would end upon the introduction of a proportional voting system – a move which, although positive in itself, would further entrench the fault lines between the Green and Labour lefts.

There are numerous ways that this could be overcome which would avoid the Greens simply dissolving themselves or quietly surrendering their politics. If it carried majority support in the party, the Green Party could reach the same arrangement with Labour that the Co-operative Party has: it would have its own structures, and would run Green-Labour candidates in places where it won the selection inside the local Labour Party. If there is no majority for such an arrangement, socialist Greens who want a higher degree of unity with Labour could form a faction, first within the Greens, and, if they continued to lose the argument, they could break away to form a platform in Labour.

As the seemingly impossible becomes a reality, there will be all kinds of realignments in the political space that the Labour left and Green left both claim to occupy – not to mention a potential split on Labour’s right wing. The best hope for a healthy realignment of the British left lies in an honest exchange of ideas; a newly democratised and pluralistic Labour Party which embraces – rather than excludes – political energy formerly to its left; and a willingness on the part of external political forces to orientate themselves towards Labour as the political expression of a mass movement. Those forces should involve the left wing of the Green Party.