Taxing times for the coalition (contd...)

The £7bn of pension tax relief that Osborne won't cut.

Just in case there was any risk of the coalition row on tax policy cooling down for a day or two, along comes a new report today, Tax and the Coalition, to fan the flames.

We do, of course, need to bear in mind that in this choppy pre-party conference period, there is bound to be a rash of publications appealing to the party faithful and burnishing the author's credentials in their eyes. Nonetheless, Lord Newby -- author of the report -- is a well connected Liberal Democrat peer and tax-expert, known to be close to Vince Cable. His report pulls no punches. The 50p rate must be preserved until fiscal consolidation is achieved; the Laffer-curve economics of those on the right calling for its abolition is dismissed; and a raft of tax raising measures are proposed that would hit the seriously affluent including a mansion tax on properties over £2m (served up with a swipe against Eric Pickles), an increase in capital gains tax, a land value tax, and further anti-avoidance initiatives.

Most will view all this as yet another twist in the 50p tax-rate saga, but more interesting -- and ultimately more important -- is the proposal to abolish higher rate tax-relief for pension contributions. A massive £7bn is still spent on this staggeringly regressive policy (benefiting only the richest 12 per cent of tax payers).

The long-standing defence of higher rate tax-relief, such as it is, has been that it is needed to avoid a form of 'double taxation' - paying tax on the income from your pension at a higher rate than the relief received when contributions were first made. Newby gives this short shrift, arguing that it would only apply to a vanishingly small number of people (he estimates that someone would have to have a pension pot of over £1.35m before this would occur). Massive spending on higher rate tax-relief is a luxury for the affluent that shouldn't have been allowed to grow so much in the good times and certainly can't be afforded in the bad.

It's important to put the generosity of this £7bn into the context of our long term "pensions crisis" for those on low-to-middle incomes ("crisis" is horribly overused in today's politics, but not silly in this instance). A flow of reports have highlighted the extent to which British households are failing to save enough to guarantee an adequate income in retirement, and the ONS has pointed out that over a million people have stopped contributing to personal pensions over recent years. Two out of three of those on low-to-middle incomes are not contributing to their own pension. The combination of chronic under-saving and rapidly increasingly life expectancy, if left unchecked, will condemn a generation of pensioners to poverty in retirement.

There is a major program of private pension reform in the pipeline, not least automatic enrolment starting from 2012. But there is deep concern about the capacity of those on low-wages to actually make their contributions given the wider squeeze on household finances and current levels of indebtedness. And the scale of the incentives on offer to encourage them to do so will be relatively modest.

Today's report is a reminder that the 2010 Liberal Democrat manifesto committed to abolish higher rate pensions tax-relief, so that everyone would receive tax-relief at the basic rate. (Indeed some within the Labour negotiating team at the time of the coalition talks saw the Lib Dem proposal as a welcome opportunity to rebalance resources away from the most affluent). Since then, we've heard precious little from the coalition on this issue other than a (sensible) tweaking of the Labour government's belated commitment to restrict but not abolish tax-relief for the seriously rich: the policy is now to reduce the annual tax-deductible allowance from £255,000 to £50,000 and the lifetime allowance from £1.8m to the measly sum of £1.5m. Indeed, on this major element of public expenditure, the coalition appears almost uniquely reticent to make further savings (when it comes to tax-reliefs, small-staters often become big-spenders). Next time a minister says that, sadly, they have no alternative to cutting back this or that programme aimed at the disadvantaged, let's hope someone asks them why this £7bn is so untouchable.

So what might we glean about wider tax politics from today's report? First, it is a stark reminder of the precarious ideological balancing act that Clegg presides over within his party and in the coalition. Many on the Labour benches would happily agree with the great majority, if not all, of Newby's proposals. Rest assured, the same cannot be said of the Conservatives.

Second, it brings home how little thinking about long-term tax reform is coming out of Labour circles at the moment. The abolition of higher-rate tax relief should be just one element of this, and a rather obvious one, so it is surprising that Labour appears content to cede this territory to the Lib Dems. The savings on offer could be used for any number of good purposes -- not least in the short term, for a targeted tax-cut for low-to-middle income families; and in the longer term providing stronger incentives to encourage these households to save.

Third, the Lib Dem and (in-time) Labour leaderships are likely to view this £7bn as low-hanging fruit when they start to search for resources to pay for their next manifestos. So if the Conservatives think the abolition of higher-rate relief is a bridge too far, they risk starting the next election campaign with a black hole of £7bn relative to their rivals. This will, at some point, trouble them, so they will also have to think long and hard about whether they can themselves make further cuts before then.

Finally, it highlights the pivotal role that the policy of raising personal allowances has played in yoking together the coalition in support of a totemic tax-reform measure in the early part of the parliament. And it suggests how hard it will be for them to find a "phase 2" tax policy which provides the same political adhesive. Anyone who thinks that coalition relations on tax will be plain sailing once the issue of the 50p rate is finally resolved needs to think again.

Gavin Kelly is chief executive of the Resolution Foundation.

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

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Former Irish premier John Bruton on Brexit: "Britain should pay for our border checks"

The former Taoiseach says Brexit has been interpreted as "a profoundly unfriendly act"

At Kapıkule, on the Turkish border with Bulgaria, the queue of lorries awaiting clearance to enter European Union territory can extend as long as 17km. Despite Turkey’s customs union for goods with the bloc, hauliers can spend up to 30 hours clearing a series of demanding administrative hoops. This is the nightmare keeping former Irish premier John Bruton up at night. Only this time, it's the post-Brexit border between Northern Ireland and the Republic, and it's much, much worse.   

Bruton (pictured below), Taoiseach between 1994 and 1997, is an ardent pro-European and was historically so sympathetic to Britain that, while in office, he was pilloried as "John Unionist" by his rivals. But he believes, should she continue her push for a hard Brexit, that Theresa May's promise for a “seamless, frictionless border” is unattainable. 

"A good example of the sort of thing that might arise is what’s happening on the Turkish-Bulgarian border," the former leader of Ireland's centre-right Fine Gael party told me. “The situation would be more severe in Ireland, because the UK proposes to leave the customs union as well."

The outlook for Ireland looks grim – and a world away from the dynamism of the Celtic Tiger days Bruton’s coalition government helped usher in. “There will be all sorts of problems," he said. "Separate permits for truck drivers operating across two jurisdictions, people having to pay for the right to use foreign roads, and a whole range of other issues.” 

Last week, an anti-Brexit protest on the border in Killeen, County Louth, saw mock customs checks bring traffic to a near standstill. But, so far, the discussion around what the future looks like for the 260 border crossings has focused predominantly on its potential effects on Ulster’s fragile peace. Last week Bruton’s successor as Taoiseach, Bertie Ahern, warned “any sort of physical border” would be “bad for the peace process”. 

Bruton does not disagree, and is concerned by what the UK’s withdrawal from the European Convention on Human Rights might mean for the Good Friday Agreement. But he believes the preoccupation with the legacy of violence has distracted British policymakers from the potentially devastating economic impact of Brexit. “I don’t believe that any serious thought was given to the wider impact on the economy of the two islands as a whole," he said. 

The collapse in the pound has already hit Irish exporters, for whom British sales are worth £15bn. Businesses that work across the border could yet face the crippling expense of duplicating their operations after the UK leaves the customs union and single market. This, he says, will “radically disturb” Ireland’s agriculture and food-processing industries – 55 per cent of whose products are sold to the UK. A transitional deal will "anaesthetise" people to the real impact, he says, but when it comes, it will be a more seismic change than many in London are expecting. He even believes it would be “logical” for the UK to cover the Irish government’s costs as it builds new infrastructure and employs new customs officials to deal with the new reality.

Despite his past support for Britain, the government's push for a hard Brexit has clearly tested Bruton's patience. “We’re attempting to unravel more than 40 years of joint work, joint rule-making, to create the largest multinational market in the world," he said. It is not just Bruton who is frustrated. The British decision to "tear that up", he said, "is regarded, particularly by people in Ireland, as a profoundly unfriendly act towards neighbours".

Nor does he think Leave campaigners, among them the former Northern Ireland secretary Theresa Villiers, gave due attention to the issue during the campaign. “The assurances that were given were of the nature of: ‘Well, it’ll be alright on the night!’," he said. "As if the Brexit advocates were in a position to give any assurances on that point.” 

Indeed, some of the more blimpish elements of the British right believe Ireland, wedded to its low corporate tax rates and east-west trade, would sooner follow its neighbour out of the EU than endure the disruption. Recent polling shows they are likely mistaken: some 80 per cent of Irish voters say they would vote to remain in an EU referendum.

Irexit remains a fringe cause and Bruton believes, post-Brexit, Dublin will have no choice but to align itself more closely with the EU27. “The UK is walking away,” he said. “This shift has been imposed upon us by our neighbour. Ireland will have to do the best it can: any EU without Britain is a more difficult EU for Ireland.” 

May, he says, has exacerbated those difficulties. Her appointment of her ally James Brokenshire as secretary of state for Northern Ireland was interpreted as a sign she understood the role’s strategic importance. But Bruton doubts Ireland has figured much in her biggest decisions on Brexit: “I don’t think serious thought was given to this before her conference speech, which insisted on immigration controls and on no jurisdiction for the European Court of Justice. Those two decisions essentially removed the possibility for Ireland and Britain to work together as part of the EEA or customs union – and were not even necessitated by the referendum decision.”

There are several avenues for Britain if it wants to avert the “voluntary injury” it looks set to inflict to Ireland’s economy and its own. One, which Bruton concedes is unlikely, is staying in the single market. He dismisses as “fanciful” the suggestions that Northern Ireland alone could negotiate European Economic Area membership, while a poll on Irish reunification is "only marginally" more likely. 

The other is a variation on the Remoaners’ favourite - a second referendum should Britain look set to crash out on World Trade Organisation terms without a satisfactory deal. “I don’t think a second referendum is going to be accepted by anybody at this stage. It is going to take a number of years,” he said. “I would like to see the negotiation proceed and for the European Union to keep the option of UK membership on 2015 terms on the table. It would be the best available alternative to an agreed outcome.” 

As things stand, however, Bruton is unambiguous. Brexit means the Northern Irish border will change for the worse. “That’s just inherent in the decision the UK electorate was invited to take, and took – or rather, the UK government took in interpreting the referendum.”