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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Emmanuel Macron's French election victory may change less than most expect

The centrist is not the first to succeed from outside the traditional parties in the Fifth Republic.

Emmanuel Macron has won the first round of the French presidential election, and will face Marine Le Pen in the run-off.

The numbers that matter: Emmanuel Macron 24 per cent, Le Pen 21 per cent, François Fillon 19.9 per cent, Jean Luc Mélenchon 19.9 per cent and Benoît Hamon 6.3 per cent.

According to the polls - which came within 0.9 per cent of the correct result in the first round - Macron will easily defeat Marine Le Pen in the second round.

The single transferable take that compares Macron to Hillary Clinton and Le Pen to Trump ignores a few things. Not least his programme, the different electoral system and the fact that Macron is popular - the most popular politician in France, in fact. Jean Luc Mélenchon declined to back a candidate in the second round and will poll his supporters on who his leftist bloc should back. But it's not comparable to the feud between Bernie Sanders and Clinton - which, in any case, was overwritten. Most Sanders supporters backed Clinton in November. The big story of that election was that the American mainstream right backed Donald Trump despite his manifold faults.

The French mainstream right is a very different beast. Fillon has already thrown his weight behind Macron, warning against the "violence" and "intolerance" of the National Front and the "economic chaos" its programme would inflict. And to the extent that it matters, Hamon has also endorsed his former party colleague, saying that there is a difference between a "political adversary and an enemy of the Republic."

So, if he wins, has everything changed, changed utterly? That's the line in most of the papers this morning, but I'm not so sure. French politics has always been more fissiparous than elsewhere, with parties conjured up to facilitate runs for the Presidency, such as the Democratic Movement of perennial candidate, now Macron backer François Bayrou, and Mélenchon's own Left Party.

I'm dubious, too, about the idea that Macron is the first to succeed from outside the traditional centre-right and centre-left blocs in the history of the Fifth Republic. That honour surely goes to Valéry Giscard d'Estaing, a popular finance minister in a Gaullist administration, who ran on a independent centrist platform in 1974 - and won the presidency.

Giscard d'Estaing had no majority in the National Assembly and had to "cohabit" with his former colleagues on the Gaullist right. In the long run, far from upending the left-right pattern of French politics, he continued it. (Indeed, d'Estaing is now a member of the centre-right Republican Party.)

You don't have to look hard to see the parallels with Macron, a popular finance minister in a Socialist administration, running on an independent centrist platform and very likely to win, too.

France's underreported and under-polled legislative elections in June will give us an idea of the scale of the change and how lasting it may be. If, freed from the taint of Fillon's scandals, the French Republicans can win the legislative elections then talk of the "death of the traditional centre-right" is going to look very silly indeed.

Equally, while Hamon won the presidential nomination, the Socialist Party's legislative candidates are largely drawn from the party's right. If En Marche!, Macron's new party, can go from no seats at all to the largest group but are short of a majority their natural allies in getting through Macron's programme will be from the remains of the Socialists. Far from irrevocably changing the pattern of French politics, Macron's remarkable success may simply mark a period of transition in the life of the French Left.

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.

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