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.

Getty
Show Hide image

No, the Brexit vote wasn't just about immigration

The data shows that most voters want a fairer society. Labour must fight for this in the Brexit negotiations. 

The result of the UK referendum to leave the European Union has shaken the political establishment to its core. As I have argued since then, it should be a wakeup call to all political parties.

Some have also argued that the referendum result is having international repercussions, with the election of Donald Trump to the White House cited as "Brexit Plus Plus". With the imminent election in France, and Germany’s later this year, responsible analysts are trying to understand why people voted the way they did and what this means. Too often, there are knee jerk explanations without any evidentiary justification to back them up. 

Analysis of who voted to leave shows the majority of people who voted to leave live in the South of England, and 59 per cent were from the middle classes (A, B, C1). Only 21 per cent of people in the lowest income groups voted to leave.

Analysis of why people voted as they did is more complex. This includes an increase in Euroscepticism particularly from older, middle class voters; concerns about globalisation and the impact on jobs; inequalities and being left behind; and new voters who didn’t vote in the 2015 General Election, for whom immigration was a concern. When this analysis is overlaid on analysis of that election, some themes emerge. The attitudes and values of the majority of the British public are firmly rooted in the desire for a fairer society, based on principles of equality and social justice. Although immigration played a part in the election and referendum results, perceived competence, being "left behind" and disillusionment with the direction of change were the key drivers.

Whether people voted to remain or leave, they did so because they believed that they and their families would be better off, and the majority who voted believed they would be better off if we leave the EU. Labour accepts and respects this. We have said that we will vote for Article 50, but we intend to hold this Tory government to account to ensure we get the best possible deal for the country.

In his speech last week, Jeremy Corbyn set out the issues that Labour will hold the government to account on. We have been absolutely clear that we want tariff-free access to the single market, to ensure that Britain continues to trade openly with our European neighbours, and to protect the cost of living for families struggling to get by. Getting the best deal for the UK means that we must continue to have a strong relationship with our EU neighbours.

Under my work and pensions portfolio, for example, we know that 40 per cent of pension funds are invested outside of the UK. If we want to guarantee a dignified and secure retirement for our pensioners, we must ensure that savers can get the best returns for the investments they make.

We also know that many of the protections that have until now been offered by the European Union must continue to be guaranteed when we leave. Provisions that secure the rights of disabled people, or that protect worker’s rights are an essential part of British society, enhanced by the EU. These cannot be torn up by the Tories.

Defending these rights is also at the heart of our approach to immigration. The dire anti-migrant rhetoric from some parts of the media and certain politicians, is reprehensible. I reject this scapegoating, which has fear and blame at its heart, because it is not true. Blaming migrants for nearly seven wasted years of Tory austerity when they are net contributors of over £2bn a year to the economy is perverse.

Of course we need to respond when public services are coming under pressure from local population increases. That’s why Labour wants to reinstate the Migration Impact Fund that the Tories abolished. We also need to ensure new members of communities get to know their new neighbours and what’s expected of them.

We believe that migrants’ broader contribution to British society has too often been obscured by the actions of unscrupulous employers, who have exploited new arrivals at the expense of local labour. A vast network of recruitment and employment agencies has developed in this country. It is worth hundreds of billions of pounds. Last year over 1.3m people were employed in the UK by these agencies. In 2007, 1 in 7 of these people came from the EU. We should ask how many are recruited directly from the EU now, and offered precarious work on very low wages whilst undercutting local labour. Labour will put an end to this practice, in order to protect both those who come here to work and those that grew up here.

Importantly, however, we cannot let our exit from the EU leave us with skill shortages in our economy. Our current workforce planning is woeful, particularly for the long-term. We need to reduce our need for migrant labour by ensuring our young, and our not so young, are trained for the jobs of the future, from carers to coders. Again, the Conservatives have undermined people’s chances of getting on by cutting college funding and the adult skills budget.

Unlike the government, Labour will not shirk from our responsibilities to the nation. Our plans for Brexit will respect the referendum result, whilst holding the Government to account and delivering a better future for all our people, not just the privileged few.

Debbie Abrahams is shadow work and pensions secretary.