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.

How Sadiq Khan won the London mayoral election

The Labour candidate rooted his campaign in his inspirational personal story and learned from his party's general election defeat. 

This time, the polls weren’t wrong. For months, as Sadiq Khan maintained his lead over Zac Goldsmith, the Labour candidate’s team were haunted by memories of the 2015 general election. The Conservatives’ unforeseen majority meant victory was never assumed. Labour MPs feared that low turnout or a “Bradley effect”, with voters shunning a Muslim candidate in the privacy of the polling booth, would destroy Khan's hopes.

But his victory (which will shortly be officially announced) was just as comfortable as forecasts suggested. It is hard to recall that Khan's triumph was never initially regarded as inevitable. London is a Labour city but one that has twice elected a Conservative. Many suggested that Zac Goldsmith - telegenic, green, independent-minded - could emulate Boris Johnson’s achievements. Yet the Tory candidate was not merely beaten but thrashed. After a cynical campaign that painted Khan as the friend of Islamist extremists, he suffered the worst fate for a politician: losing with dishonour.

As the Labour candidate, Khan (who I recently profiled) began with a default advantage. In recent elections, Londoners have voted for his party in ever greater numbers (44 per cent in 2015). But Khan’s victory cannot be attributed to partisan loyalties alone. As even the pro-Goldsmith Evening Standard conceded in its final editorial: “[He] fought the stronger and more combative campaign”.

For Khan’s team, Miliband’s fate was not just a lesson in the fallibility of polling. It was a lesson in what not to do. From the outset, they vowed to avoid the errors that dogged that campaign. 

Khan’s strategists cited four insights as central to his success. The first was that “personality matters more than policy”. Having seen Miliband defined by his opponents (“weak”, “weird”, “treacherous”), Khan’s team “set out hard and fast to paint a picture of who he was”. His election leaflets rooted his policies in his personal story: “the bus driver’s son who’ll make commuting more affordable”, “the council estate boy who’ll fix the Tory housing crisis” and “the British Muslim who’ll take on the extremists”. By the end of the campaign, journalists groaned at the mention of his bus driver father: a sure sign of success. As victorious campaigns testify, the best messaging is simple and repetitive. “The bus driver’s son” was Khan’s equivalent of the Tories’ “long-term economic plan”. By contrast, Goldsmith failed to define himself personally, allowing Labour to paint the billionaire’s son as posh and aloof.

The second insight was that policy should be announced early - and then endlessly reannounced. All of Khan’s signature pledges - the fares freeze, “first dibs” on new homes, the “London living rent” - were made by January. Having left the blocks early, Khan opened up a double-digit lead. From this point onwards, Goldsmith never looked competitive. Unlike Khan, he delayed major announcements until the closing stages of the campaign. It was on the final day that the lifelong environmentalist pledged in the Evening Standard to be “the greenest mayor ever” - a pitch made all too rarely before.

The third insight was that winning campaigns don’t adopt a “35 per cent strategy” - shorthand for Miliband’s narrow focus on Labour’s core vote and former Liberal Democrats. “We decided that we were literally going to compete for every vote,” a strategist said. In contrast to Ken Livingstone, who sought victory through a rainbow coalition of left-wingers, Khan spent more time in Tory-leaning outer London than the city’s inner half. He engaged positively with all media titles, including the Sun, the Daily Mail and City AM, and avoiding picking unnecessary fights.

Having run to Tessa Jowell’s left in Labour’s selection contest (trading on his opposition to the Iraq war, the welfare reform bill and his nomination of Jeremy Corbyn), he swiftly made a centrist pitch to the electorate at large. He would, he repeatedly declared, be “the most pro-business mayor ever”. Milibandite policies such as the 50p tax rate and the “mansion tax” were disowned. In a defining interview with the Mail on Sunday a week after his selection, Khan ruthlessly distanced himself from Corbyn, condemning his failure to sing the national anthem and presciently warning of Labour’s “anti-Jewish” image. He went on to make just two public appearances with his party's leader and was listed in the “hostile” group of MPs.

The fourth insight was to anticipate and prepare for opponents’ attacks. Khan’s team knew that the Tories would play the “extremism” card - and pre-empted it. In a speech to the parliamentary press gallery on 19 November 2015 following the Paris attacks, he declared that Muslims had a “special role” to play in combating the threat “not because we are more responsible than others, as some have wrongly claimed, but because we can be more effective at tackling extremism than anyone else”. Khan spoke of how “too many British Muslims grow up without really knowing anyone from a different background”, warning that the political establishment had for too long “tolerated segregation”  at the expense of “creating a common life”. The speech was well-received by the conservative press and enhanced Khan’s standing among the lobby.

As the Tories ramped up their attacks, the Labour candidate maintained his composure. “I’ve watched him go through this extremism row two or three times quite closely,” an MP told me. “He’s extraordinarily calm under that level of pressure. He draws on a well of inner stability that is really impressive. Tony Blair could obviously do it in spades but there are not that many senior politicians who can do it.”

Having established a commanding poll lead, Khan’s team were able to dismiss Goldsmith’s tactics as “desperate”. Again, the contrast with Miliband was marked. Confronted by the Tory charge that he would “do a deal” with the SNP, the Labour leader was slow to react. The fragility of his party’s polling position meant he struggled to deny there would be any arrangement. Miliband’s “weak” image meant voters readily believed that he would be held to ransom by the nationalists. By contrast, Khan’s positive media profile meant voters simply didn’t buy the “extremism” charge. Indeed, polling showed that he was more trusted than Goldsmith to tackle the terrorist threat.

After repeatedly distancing himself from Livingstone and seeking to rebuild fractured relations with the Jewish community, Khan was able to credibly condemn the former mayor’s incendiary remarks on Hitler and Zionism. The speed and conviction with which he called for his expulsion was typical of his efficient decision making.

The strength of Khan’s campaign reflected the qualtiy of his team. He recruited Patrick Hennessey, one of Westminster’s most respected spin doctors, as his communications director and employed his trusted and long-standing aides Jack Stenner (political director), Nick Bowes (head of policy) and Leah Krietzman (senior adviser). The close-knit team stood in contrast to Miliband’s, which was perpetually divided and lacked clear lines of authority.

Khan’s victory completes his remarkable personal journey from council home to City Hall and provides political consolation for Labour. As mayor, his administrative focus will be on delivering his signature pledges: the fares freeze, the 50 per cent affordable housing target and the London Living Rent. But strategists say he will also seek progress in four longer-term “legacy” areas: social integration, skills and further education, the night-time economy and air pollution. Andrew Adonis, the cerebral former cabinet minister, is likely to take on a transport role. 

As the most senior elected Labour politician (with the third largest personal mandate of any in Europe), Khan will inevitably be touted as a future leader. But he will wisely maintain his distance from the party's Westminster warfare, resigning his Tooting seat. Unlike Boris Johnson, he will not treat the capital as a mere springboard to greater things.

Beyond London, as the first Muslim mayor of a major western city, Khan will be a figure of global significance. His election is a rebuke to extremists of all stripes, from Donald Trump to Abu Bakr Al-Baghdadi, who assert that religions cannot peacefully co-exist.

As the first Labour mayor since 2008, Khan stands as one of the winners of British politics. No one has ever prospered by betting against him. At the 2010 general election, he defended his Tooting seat from an aggressive and well-funded Conservative challenge. In the same year, he managed Miliband’s leadership campaign, masterminding the defeat of elder brother David. In the 2014 local elections, after he was rewarded with the post of shadow London minister, he achieved Labour’s best result in the capital since 1971. At last year’s general election, on an otherwise morose night, the party gained seven London seats, its strongest performance since 2001. In the mayoral selection contest, Khan beat the favourite, Tessa Jowell, by a landslide. 

He has now won his greatest prize yet. If Miliband’s defeat was a lesson in failure, Khan's victory is an inspiring lesson in success. 

George Eaton is political editor of the New Statesman.