Budget 2012: 20 minutes in, 1-0 Team Clegg

The Lib Dems are right to identify higher rate pension tax relief as ripe for review.

It may still be early February but the March Budget has already kicked off. This morning's Telegraph splashes with Danny Alexander's first attacking move, with the Chief Secretary saying he strongly supports a reduction in higher rate pension tax relief to fund further increases in the personal allowance. For all the Lib Dem's previous talk of mansion taxes and crackdowns on tax evasion, this is serious stuff. Alexander claims the government could save £7 billion by reducing the 40p tax relief currently given to higher rate tax payers to 20p, the first cash on the table that would come close to funding his party's ambition on the £10k allowance.

If there's one thing Alexander's intervention confirms it's this: the key question for the 2012 Budget is no longer whether the Lib Dems will get anything on personal allowances but how the next increase will be paid for. This marks a big change of tactics for Clegg's team from previous budgets. They've come hard out of the blocks in a very public way and not just to argue for the allowance move itself -- easy words, after all -- but putting a big money, progressive, revenue-raising measure front and centre.

It's a shift of strategy that was marked first by Nick Clegg's speech to the Resolution Foundation in late January when the message was more coded but the intention no less clear: “I want to help the hard-pressed and the hardworking. If that means asking more from those at the top - so be it."

And, make no mistake, for those on low or modest pay, it's a change in emphasis -- if it pays off -- that could be hugely important. As Gavin Kelly has argued before in the New Statesman, the coalition has shown a deeply worrying instinct in recent months to make deep raids into tax credits as their default way of funding their wider ambitions. It is now clear that Clegg's team realise their previous strategy -- in which they win the offensive for a higher allowance but fail to defend areas of spend that are absolutely essential for low to middle income households -- has become utterly unsustainable. These earlier failures will sadly still bite low to middle income households hard when substantial tax credit cuts bite this April. But at least if the Lib Dem's new approach works, things might not get worse.

So all in all, 20 minutes in to Budget 2012, it's probably fair to scratch up 1-0 to Team Clegg. They've come out early and marked their territory well. And in higher rate pension tax relief they've identified an area of public spend that there's long been a good case for reviewing. Ultimately, of course, if a week's a long time in politics, six weeks is an aeon in budget negotiations. Staking your claim early is bold but it's also risky. The key question now is whether the Lib Dems can hold on for the win. One thing's for sure: with their funding ambitions now out in the open for all to see, any further cuts to tax credits in March would be a stinging humiliation.

James Plunkett leads the Resolution Foundation's Commission on Living standards.

James Plunkett is director of policy and development at the Resolution Foundation

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What is the EU customs union and will Brexit make us leave?

International trade secretary Liam Fox's job makes more sense if we leave the customs union. 

Brexiteers and Remoaners alike have spent the winter months talking of leaving the "customs union", and how this should be weighed up against the benefits of controlling immigration. But what does it actually mean, and how is it different from the EU single market?

Imagine a medieval town, with a busy marketplace where traders are buying and selling wares. Now imagine that the town is also protected by a city wall, with guards ready to slap charges on any outside traders who want to come in. That's how the customs union works.  

In essence, a customs union is an agreement between countries not to impose tariffs on imports from within the club, and at the same time impose common tariffs on goods coming in from outsiders. In other words, the countries decide to trade collectively with each other, and bargain collectively with everyone else. 

The EU isn't the only customs union, or even the first in Europe. In the 19th century, German-speaking states organised the Zollverein, or German Customs Union, which in turn paved the way for the unification of Germany. Other customs unions today include the Eurasian Economic Union of central Asian states and Russia. The EU also has a customs union with Turkey.

What is special about the EU customs union is the level of co-operation, with member states sharing commercial policies, and the size. So how would leaving it affect the UK post-Brexit?

The EU customs union in practice

The EU, acting on behalf of the UK and other member states, has negotiated trade deals with countries around the world which take years to complete. The EU is still mired in talks to try to pull off the controversial Transatlantic Trade and Investment Partnership (TTIP) with the US, and a similar EU-Japan trade deal. These two deals alone would cover a third of all EU trade.

The point of these deals is to make it easier for the EU's exporters to sell abroad, keep imports relatively cheap and at the same time protect the member states' own businesses and consumers as much as possible. 

The rules of the customs union require member states to let the EU negotiate on their behalf, rather than trying to cut their own deals. In theory, if the UK walks away from the customs union, we walk away from all these trade deals, but we also get a chance to strike our own. 

What are the UK's options?

The UK could perhaps come to an agreement with the EU where it continues to remain inside the customs union. But some analysts believe that door has already shut. 

One of Theresa May’s first acts as Prime Minister was to appoint Liam Fox, the Brexiteer, as the secretary of state for international trade. Why would she appoint him, so the logic goes, if there were no international trade deals to talk about? And Fox can only do this if the UK is outside the customs union. 

(Conversely, former Lib Dem leader Nick Clegg argues May will realise the customs union is too valuable and Fox will be gone within two years).

Fox has himself said the UK should leave the customs union but later seemed to backtrack, saying it is "important to have continuity in trade".

If the UK does leave the customs union, it will have the freedom to negotiate, but will it fare better or worse than the EU bloc?

On the one hand, the UK, as a single voice, can make speedy decisions, whereas the EU has a lengthy consultative process (the Belgian region of Wallonia recently blocked the entire EU-Canada trade deal). Incoming US President Donald Trump has already said he will try to come to a deal quickly

On the other, the UK economy is far smaller, and trade negotiators may discover they have far less leverage acting alone. 

Unintended consequences

There is also the question of the UK’s membership of the World Trade Organisation, which is currently governed by its membership of the customs union. According to the Institute for Government: “Many countries will want to be clear about the UK’s membership of the WTO before they open negotiations.”

And then there is the question of policing trade outside of the customs union. For example, if it was significantly cheaper to import goods from China into Ireland, a customs union member, than Northern Ireland, a smuggling network might emerge.

 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.