Why Nick Clegg's still taxing Cameron and Miliband

The Lib Dem leader and the coming Budget.

It remains a curiosity of today's political scene that a small and unpopular party bumping along on 7 to 10 per cent in opinion polls is making the waves on the central issue of tax policy. On this one issue at least, the two main parties find themselves reacting to the gauntlet the Liberal Democrats have laid down.

Nick Clegg's recent speech to the Resolution Foundation making the case for going further and faster in reaching a personal tax allowance of £10,000 has been widely reported as a significant moment in the genesis of the forthcoming budget which due to the precarious position of the economy, and the increasingly creaky nature of the Coalition, is destined to be a highly charged affair both fiscally and politically.

Significant it may have been, but not for the rather mundane reason that the leader of the Liberal Democrats made the case for delivering on one of his central manifesto commitments as soon as possible. Dog bites man.

It was, however, noteworthy for three less commented upon reasons.

First, because it was an attempt to signal the end of the Liberal Democrats "give and take" strategy in relation to those on low and middle incomes. Up until now each rise in the personal allowance (or indeed progress on other Liberal Democrat priorities) has been funded in large part by cuts to tax credits and increases in taxes that particularly hurt the precise group the Liberal Democrats state they are seeking to help.

Hitherto this has completely neutered their claims to being a force for tax fairness. Clegg's new and unmistakeable message is that this time it will be different. From now on the wealthy should pay for further increases in the tax allowance - whether through wealth taxes, less avoidance or cuts in higher rate pension tax-relief.

If Clegg can make this approach stick -- and that is a very big if -- it makes additional increases in the personal allowance a different political proposition for both the Conservatives (a straightforward hit to some of their core support) and Labour (why oppose?).

That said, this new and potentially more progressive approach to funding increased tax allowances may well be completely lost on the public given that deep cuts to tax credits already in the pipeline (based on previous budgets that Clegg signed up to) will bear down on the working poor for years to come.

Second, Clegg's budget intervention represented the next stage in the Lib Dem's differentiation strategy. They expect, but still don't know for sure, that Osborne will agree to some progress on personal allowances. But even if they fail their judgement is that they would be better to do so having at least have looked publicly distinct (even if ultimately ineffectual), rather than seeming to meekly go along with whatever Osborne ends up announcing.

Playing your budget hand quite so openly is a high-stakes move, and not one borne from a position of strength.

Finally, Clegg's open air budget negotiations have certainly turned up the heat on Labour. Over the last few weeks there have been many more column inches written about Liberal Democrat-Tory budget disagreements then there have been about the opposition's position.

Moreover, Clegg has stolen a march on his opponents both in terms of being the leader talking about taxing the rich and the one reported as caring about cutting income tax on the low paid. Right now it is he who is occupying this large swath of political terrain -- more baggy centre, then squeezed middle -- which is about rebalancing the tax system so it better chimes with our straightened times.

Labour to date have been largely silent on this tax rebalancing argument, though Ed Miliband has been nodding towards the need for increased taxes at the top. Ed Balls' intervention yesterday was significant therefore not just in that it broadened out Labour's position on tax cuts from VAT towards other measures, like personal allowances, that the coalition might actually move on. But it also succeeded in inserting Labour into the middle of the Budget debate.

All three parties face some delicate judgements over the next four weeks. George Osborne will need to balance carefully his instinctive reluctance (and that of his backbenchers) to hand a major victory to Clegg with the potentially destabilising effects for the Coalition of the Liberal Democrats coming away with nothing.

Labour will need to strain to explain to a sceptical public how its call for large tax cuts in the here and now fits with its renewed determination to reclaim fiscal responsibility over the medium term, a theme which was so much in evidence at the turn of the year. And they rapidly need to come up with ideas of their own to prove it is they who are best placed to lead the debate on tax fairness.

Meanwhile Clegg desperately needs to show that he can convert his recent media momentum on tax reform into a Budget victory -- and, more than that, into an upward tick in the polls.

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

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The Autumn Statement proved it – we need a real alternative to austerity, now

Theresa May’s Tories have missed their chance to rescue the British economy.

After six wasted years of failed Conservative austerity measures, Philip Hammond had the opportunity last month in the Autumn Statement to change course and put in place the economic policies that would deliver greater prosperity, and make sure it was fairly shared.

Instead, he chose to continue with cuts to public services and in-work benefits while failing to deliver the scale of investment needed to secure future prosperity. The sense of betrayal is palpable.

The headline figures are grim. An analysis by the Institute for Fiscal Studies shows that real wages will not recover their 2008 levels even after 2020. The Tories are overseeing a lost decade in earnings that is, in the words Paul Johnson, the director of the IFS, “dreadful” and unprecedented in modern British history.

Meanwhile, the Treasury’s own analysis shows the cuts falling hardest on the poorest 30 per cent of the population. The Office for Budget Responsibility has reported that it expects a £122bn worsening in the public finances over the next five years. Of this, less than half – £59bn – is due to the Tories’ shambolic handling of Brexit. Most of the rest is thanks to their mishandling of the domestic economy.

 

Time to invest

The Tories may think that those people who are “just about managing” are an electoral demographic, but for Labour they are our friends, neighbours and the people we represent. People in all walks of life needed something better from this government, but the Autumn Statement was a betrayal of the hopes that they tried to raise beforehand.

Because the Tories cut when they should have invested, we now have a fundamentally weak economy that is unprepared for the challenges of Brexit. Low investment has meant that instead of installing new machinery, or building the new infrastructure that would support productive high-wage jobs, we have an economy that is more and more dependent on low-productivity, low-paid work. Every hour worked in the US, Germany or France produces on average a third more than an hour of work here.

Labour has different priorities. We will deliver the necessary investment in infrastructure and research funding, and back it up with an industrial strategy that can sustain well-paid, secure jobs in the industries of the future such as renewables. We will fight for Britain’s continued tariff-free access to the single market. We will reverse the tax giveaways to the mega-rich and the giant companies, instead using the money to make sure the NHS and our education system are properly funded. In 2020 we will introduce a real living wage, expected to be £10 an hour, to make sure every job pays a wage you can actually live on. And we will rebuild and transform our economy so no one and no community is left behind.

 

May’s missing alternative

This week, the Bank of England governor, Mark Carney, gave an important speech in which he hit the proverbial nail on the head. He was completely right to point out that societies need to redistribute the gains from trade and technology, and to educate and empower their citizens. We are going through a lost decade of earnings growth, as Carney highlights, and the crisis of productivity will not be solved without major government investment, backed up by an industrial strategy that can deliver growth.

Labour in government is committed to tackling the challenges of rising inequality, low wage growth, and driving up Britain’s productivity growth. But it is becoming clearer each day since Theresa May became Prime Minister that she, like her predecessor, has no credible solutions to the challenges our economy faces.

 

Crisis in Italy

The Italian people have decisively rejected the changes to their constitution proposed by Prime Minister Matteo Renzi, with nearly 60 per cent voting No. The Italian economy has not grown for close to two decades. A succession of governments has attempted to introduce free-market policies, including slashing pensions and undermining rights at work, but these have had little impact.

Renzi wanted extra powers to push through more free-market reforms, but he has now resigned after encountering opposition from across the Italian political spectrum. The absence of growth has left Italian banks with €360bn of loans that are not being repaid. Usually, these debts would be written off, but Italian banks lack the reserves to be able to absorb the losses. They need outside assistance to survive.

 

Bail in or bail out

The oldest bank in the world, Monte dei Paschi di Siena, needs €5bn before the end of the year if it is to avoid collapse. Renzi had arranged a financing deal but this is now under threat. Under new EU rules, governments are not allowed to bail out banks, like in the 2008 crisis. This is intended to protect taxpayers. Instead, bank investors are supposed to take a loss through a “bail-in”.

Unusually, however, Italian bank investors are not only big financial institutions such as insurance companies, but ordinary households. One-third of all Italian bank bonds are held by households, so a bail-in would hit them hard. And should Italy’s banks fail, the danger is that investors will pull money out of banks across Europe, causing further failures. British banks have been reducing their investments in Italy, but concerned UK regulators have asked recently for details of their exposure.

John McDonnell is the shadow chancellor


John McDonnell is Labour MP for Hayes and Harlington and has been shadow chancellor since September 2015. 

This article first appeared in the 08 December 2016 issue of the New Statesman, Brexit to Trump