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Trouble ahead at the Treasury

Unnoticed, the Lib Dems are driving through changes to the structure of personal tax allowances. And

For many politicians, tax cuts are the elixir of politics. In times of plenty they are deployed triumphantly as evidence of a thriving economy; in times of hardship they are handed down by chancellors as a salve to a hard-pressed public. So it should come as no surprise that, even in this parliament - dominated as it has been by arguments about fiscal austerity, tax rises and lower spending - there will be a growing debate about which taxes to cut.

Political gravity will ensure this is the case. As the economy gradually recovers - at the same time as the pain of the deepest and longest wage squeeze in living memory maintains its grip on family bank balances - politicians will be desperate to offer hope of better times ahead. They will know that tax cuts won't solve the structural problem of stagnant wages, nor will they deal with the rising pressures on the cost of living. And there will still be sharply differing views about whether tax cuts for some mean tax rises for others, as opposed to further cuts to spending. But have no doubt: all party leaders will be forced to offer respite to a public whose anger about falling living standards will reach boiling point over the next few years.

So, how will the coming tussle over tax cuts play out? There will be a few early skirmishes following the Budget, which inevitably included a few popular giveaways - such as the cut in fuel duty and support for first-time housebuyers - along with a tax cut for business (and let's not forget that George Osborne has already proved capable of pulling rabbits out of a hat, as with his dramatic promise to raise the inheritance-tax threshold in October 2007 - a move that skewered Labour's plans for an early general election).

Osborne clearly wants to burnish his credentials as a Lawson-like tax reformer as well as a spending cutter, so in the months ahead he'll talk up the radicalism of his long-term ambition to merge National Insurance and income tax. But the challenges involved in this are daunting, and the Conservatives are very unlikely to go into the next election having just raised the basic rate of income tax by 12p, so don't expect this to yield practical policies any time soon.

Indeed, it says something about the topsy-turvy state of today's politics that we need to look first at the Liberal Democrats to understand the shifting politics of tax. It is perhaps the least remarked-upon story in Westminster that the smaller and deeply unpopular coalition partner is driving one of the biggest changes in domestic policy - and in a department it doesn't even control. Not since the days of David Lloyd George have Liberal politicians had such influence over the Treasury's tax policies.

The ambitions of senior Lib Dems are not to be underestimated. Nick Clegg knows what he wants. He has been fighting hard for it internally and he is going to succeed in getting most of it - notably, a £10,000 income tax personal allowance at a total cost of more than £13bn (having already secured a commitment to a rise in the personal allowance from £6,475 to £7,475, increased in the Chancellor's 23 March Budget to £8,105 in April 2012.

Clegg's party has been emboldened by the quiescence of its Conservative partners. That is in part because the £10,000 commitment is a central fact of the coalition agreement, but it has also served the Conservative leadership's purpose to go along with something that deflects irritant calls from Boris Johnson and the Tory right to prioritise the removal of the 50p tax rate for the top 1 per cent of earners - a move that would delight Labour - just as it provides Tory leaders with a ready-made and voter-friendly tax-cutting agenda to talk about.

This context helps explain why senior Liberal Democrats, battered on so many fronts, are more ideologically self-confident than their coalition partners on this naturally Conservative terrain. They are the ones making the political weather on tax. Buoyed by this, they have set about working on what they should be seeking to achieve by 2015; and, more significantly, what their distinct Liberal ambitions for the tax system should be in 2020.

As part of their wider ideological journey, Clegg and those around him view themselves as the authors of a new "fiscal liberalism". This blends the spirit of John Stuart Mill's call for a generous, tax-free allowance sufficient for "life, health and immunity from bodily pain" with the modernising zeal of last year's Mirrlees Review (produced for the Institute for Fiscal Studies), which sets out far-reaching proposals for simplifying the UK tax system.

The priority is to achieve and then surpass the totemic commitment to increasing tax-free allowances. Don't be surprised when Liberal Democrat outriders call for a detailed plan for securing the £10,000 allowance in this parliament and £15,000 in the next.

The belief is that a "liberal tax system" should protect a greater chunk of individual earnings from the state, a sharp contrast with the social-democratic view that support for families, funded through progressive income taxes and tax credits, is the beating heart of a fair tax system. Nor do the Lib Dems' ambitions end here. Clegg is likely to push for further increases in green taxes - putting him on a direct collision course with Conservative backbenchers who want big cuts to fuel duty - and for raising more revenue from "unearned income".

Footloose families

One of the great political advantages of having a single, emblematic tax policy is that, in contrast to many of the tax changes of the Blair/Brown years, it is an easy thing to communicate. Quite simply, people are likely to get it. So where's the rub? The hard truth that Clegg and his team have largely sidestepped is that the simplicity of the allowance policy comes at a sig­nificant price: the distributional effects of the strategy are distinctly odd. Some high-income households (often with no children) gain quite a lot each time the allowance is raised, while many middle-income families with children gain nothing and, indeed, are set to lose a great deal (see chart 1), and the very poorest, who don't pay tax, won't get a penny.

This is not an accident: it is a direct result of tax cuts based on individual rather than household income. Further, because this year's increased tax allowance will be linked to a reduction in the income level at which the 40p tax rate kicks in, an extra 700,000 higher-rate taxpayers will be created in April.

For now, Clegg will shrug off these charges with the broad-brush argument that individual beneficiaries are overwhelmingly basic-rate taxpayers. He will not be so relaxed if a popular sentiment emerges that his prized tax strategy offers little to precisely those working (and politically footloose) middle-income families that hold the key to the next election.

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All of this gives the Labour leadership plenty to reflect on. Apart from airing its internal travails over the 50p rate, and Ed Balls's recent call for fuel to be exempt from the January VAT increase, Labour has said remarkably little about tax. Many on the political right, together with much of the media class - and some former New Labour figures - have already written off Miliband and Balls as big-state high taxers with no "feel" for the concern of people striving to get on in life, nor the discipline to rein in a party hard-wired to tax and spend. That is likely to be a serious misjudgement.

It was Balls and Miliband who came of age masterminding the commitment to stick to Tory spending plans, and showed the steel necessary to peg Labour to pre-1997 basic and top rates of tax. You don't go through that experience in your late twenties only to forget it in your early forties.

Recently Miliband has said that he supports "genuine" tax relief for low-to-middle-income earners but won't back a "tax con" in which a personal allowance giveaway is funded out of a hike in VAT. For now, that is a reasonable position: many low-to-middle-income earners will be worse off once increased allowances and VAT are taken into account; painfully so, once cuts to tax credits are factored in. But stick to this position for too long, and Labour will be badly exposed. Few expect the recent increase in VAT to be reversed come the next election. As chart 2 shows (below), the VAT rate has long been converging on the basic rate of income tax - Labour in power tends not to cut Conservative increases to VAT, whatever it says in opposition. Nor is there much prospect of it reversing the coalition's increased tax allowances and, in doing so, dragging many modest earners back into the tax system.

So, the risk is that Miliband ends up entering an election in 2015 saying little more than: "I now realise that I agree with Nick." Labour strategists with the ear of the leader are well aware of this conundrum and are starting to work out how to respond.

Their belief is that the coalition has made a big mistake in focusing so much of the pain of cuts on working families with children, and above all women. But they are also acutely aware that to make targeted tax cuts, at the same time as they rebuild their reputation for fiscal credibility, will be no mean feat.

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Miliband's team is heartened by private polling that it has seen on how the Obama 2008 campaign managed to break out of the Republican tax trap. With targeted tax cuts for the middle classes, the Democrats were able to change the framing question from whether each party was "for or against tax cuts" (the Democrats typically being "against") to "who do you want tax cuts for?". That freed Barack Obama to outpoll John McCain as a tax cutter for "middle-class America" at the same time as he won widespread support for tax rises for the richest 2 per cent. Labour thinks there are lessons to be learned.

Return of the 10p rate

So what are the likely directions for the different parties? No one should mistake the Conservatives' current focus on measures to boost growth with what is likely to become their agenda as we get closer to 2015. It is almost inconceivable that Osborne won't build up a formidable war chest over the next few years to fund a major commitment to cut the tax burden on families, as well as abolish the 50p rate, should the Tories win the election.

The Lib Dems have the immediate political task of reaping some popular reward for this April's increased tax allowances, and a deeper challenge - perhaps an insurmountable one - in making their strategy more appealing to middle-income families with children. One option would be to attempt to persuade the Treasury to build a child allowance into the tax system for basic-rate payers. But, apart from difficult questions about the administrative feasibility, this would ignite a huge row with the Tories, who still want to introduce a married couple's allowance. Even more significantly, senior Lib Dem strategists whisper that, in the longer term, they may need to open up a debate about moving from independent taxation to a system based on household income - as was the case before 1988. The implications of this should not go unmissed: any public contemplation of ditching one of the proudest achievements of modern feminism in the name of liberal tax reform would be explosive.

And Labour? It will try to home in on the electoral sweet spot - modest- and middle-income families with children, on a household income of between roughly £25,000 and £50,000. Less clear is what it wants to offer this group. There is already scepticism in senior circles about whether it would be enough merely to reverse some of the coalition's cuts to tax credits; a fundamental rethink is needed. This would involve looking at benefits as well as taxes and grappling with thorny problems such as child benefit - something not lost on Labour strategists, who are quick to point out that "we never said all aspects of universalism are sacrosanct".

The idea would be to create a simpler way for the tax and benefit system to support modest-income families that are going to lose from cuts to tax credits, as well as middle-income families that are going to be hit by the axing of their child benefit. At the same time, Labour will have to act to support the very lowest-paid. An intriguing option here, which would also help make peace with Labour's recent past, would be to consider a reduced tax rate for the lowest earners: might we see the return of the 10p rate?

The cost of cuts

Above all, Labour will have to balance intense and contradictory pressures for tax cuts, targeted increases in spending and the rebuilding of its fiscal credibility. Harder still, any new tax cuts will be expensive. Given the size of low-to-middle-income Britain, a few billion pounds won't stretch far; a meaningful cut is likely to cost over £10bn. In view of the fiscal outlook, Labour strategists realise that they will have to raise taxes for some in order to cut for others - as do those Lib Dems who accept that, by the next election, public spending will need to recover with growth rather than be cut further.

When it comes to income tax, there is very little room for manoeuvre. The 40p rate already kicks in at a relatively low and falling level, and there is no support for raising the 50p rate. A further increase in VAT is out of the question. This suggests the need for new ways of raising revenue from wealth and high-value housing. Expect to hear squeals in response to a Labour version of a "mansion tax", a continued push on bankers' bonuses, further savings on pension-tax relief for the highest earners and new ideas for raising money from capital gains and inheritance. Generating income from these sources will be a stiff test of Labour's resolve: the party will face bitter opposition.

In the years ahead, however, the crisis of living standards will lead to something rather like a primal scream from low-to-middle-income households, demanding relief as they become even more resentful of growing wealth at the top. The politics of taxing affluence in 2015 won't be the same as they were in 2010, never mind 1997: on this matter, the past doesn't provide a guide to the future. As Obama showed in 2008, it is possible to forge a common set of interests between low- and middle-income earners and a narrative on tax that speaks to the extraordinary times in which we are living.

Gavin Kelly is chief executive of the Resolution Foundation

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

This article first appeared in the 28 March 2011 issue of the New Statesman, Why Libya? Why now?

Chris McGrath/Getty Images
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Fight to the death in Mosul

The street-by-street battle against Islamic State for control of Iraq’s second city.

The men of Iraq’s special forces map their victories over Islamic State (IS) by tracing the scars on their bodies. “These four bullets were from a sniper in Ramadi,” said one soldier, lifting his shirt to show a pockmarked torso. A gap-toothed gunner called Ahmad turned a wrist and revealed his wound, a souvenir from Fallujah. Their commander’s close-cropped hair has deep furrows, the result of a rocket-propelled grenade (RPG) attack in the same city.

Both Ramadi and Fallujah were retaken from IS this year, which restored the confidence of the Iraqi military after its humiliating retreat from the terror group. Two years ago, the Iraqi army ran from Mosul and a caliphate was declared. Now, the soldiers’ task is to build on their recent gains and liberate the country’s second-largest city.

At the tip of the spear in Mosul is the Iraqi Special Operations Forces’ 1st Brigade, also known as the Golden Division. It is commanded by Major Salam al-Abeidi, the man who survived the RPG attack in Fallujah and led the offensive against IS in Ramadi. He is a compact figure, a black streak of ­motion in his special forces uniform, never at rest. (“He would exhaust 20 soldiers,” said one of his men.) He prefers to be on the offensive. “It’s when we are in defensive positions that we take the most casualties,” he told me.

Al-Abeidi does not smile much, but he enjoys a joke. In his hands is always one of three things: a walkie-talkie, a can of Red Bull, or a cigarette. His seven-month-old German shepherd, named Caesar, has recently joined him at the special forces headquarters. Most of his men, fearless when fighting IS, are terrified of the puppy.

The major leads from the front. In the morning, he is on patrol; in the afternoon, he is on the roof guiding air strikes. One evening, I found him climbing into a tank, heading out to defend a road. “Do you ever sleep?” I asked.

“Sleep? I drink 20 cans of this a day,” he joked, holding up the energy drink.

The Golden Division is making slow but steady progress through the eastern residential neighbourhoods of Mosul. This city is different from the ones in his previous campaigns, the major told me.

“Most of the areas we fought in while in Ramadi were nearly empty of residents,” he said. “Here, it’s heavily populated, making the security forces very cautious while advancing, so as to avoid civilian casualties. The enemy uses a lot of car bombs.”

The Zahra (formerly known as Saddam) and Qadisiya 1 districts of eastern Mosul are the battlegrounds of the moment. IS has blocked the streets with concrete barriers to impede the Iraqi military advance, and the Iraqi army has constructed earthen berms with the aim of slowing down the IS car bombers. The gunfire is constant; so, too, are the boom and thud of suicide attacks and coalition air strikes.

“Here come the French,” said al-Abeidi, as fighter aircraft roared overhead while another explosion shook the eucalyptus and citrus trees of the neighbourhood’s gardens.

On the front line, a four-lane road separates the Golden Division’s Bravo Company from IS. On the lookout in an abandoned house, a young sniper named Abbas pointed out a dead IS fighter lying a few hundred metres away. “Over the last four days, I killed three Da’esh [the Arabic acronym for IS]. But my buddy, he killed four or five,” he said.

A car bomb detonated nearby, the shock wave blowing out what was left of the room’s windows. A French photographer accompanying us, who had refused to wear a helmet, almost dropped his cigarette.

Abbas fired into IS territory, a precaution in case the car bomb was followed by attackers on foot. He continued: “Here, the difficult thing for us is that IS fighters carry babies in their arms, and all of them look the same – they have beards.”

Outside, it looked and smelled like a war zone. Shops had been destroyed and I saw a burnt-out suicide truck that had crashed into a storefront. The street was littered with the remnants of another car bomb.

Car bombs are the IS equivalent of cruise missiles. The militants have no aircraft, so they rig up and deploy these heavily armoured high explosives on wheels instead. The unit I was with had at least two a day aimed at it. They move fast and are often hidden, lying in wait. Only when the military think that a neighbourhood is clear do they appear, driven at speed and often with deadly precision.

None of the forces fighting IS – the Iraqi army, the Kurdish peshmerga, the Shia militias – releases casualty numbers. If any ever does, these will show that many of their men were killed by car bombs.

To avoid the militants’ RPGs and sniper fire, Bravo Company created rat runs through homes and backyards. My guide to the front line was called Sergeant Haider. Rooms and upturned domestic life flashed past us. The sergeant’s Frank Zappa moustache and wraparound shades were complemented by a grey knitted beanie. He looked like he should have been snowboarding, not touring a front line.

“There are many more Da’esh here than in Anbar,” he said, referring to the province where Fallujah and Ramadi are situated. “Because this area has been under its control for two and a half years, Da’esh has really taken control. This looks like just the beginning of [retaking] Mosul.”

Iraq’s prime minister, Haider al-Abadi, wants Mosul “liberated” by the end of the year. That is unlikely to happen. It will take a month at least, perhaps more, to make it to the banks of the Tigris, which runs through the city. And IS is concentrated in the west. Across the river, there is worse to come.

***

The scar that Rana Ibrahim Hamad carries is not visible. It is a memory of the baby she lost shortly after giving birth during IS rule. “I lost the baby because doctors were not available. The baby had a brain haemorrhage and died,” she told me, standing on the street. We could hear the sounds of a gun battle nearby but Rana didn’t blink – she had grown used to it.

It was the first time that she, her husband, Amer, and their three-year-old daughter, Azel, had left their home in five days. Until then, the fighting around them had been too fierce.

Rana was pregnant again and ready to give birth any day. After detailed questioning by the military, the family would be allowed to leave for a hospital in Erbil. An armoured Humvee would be their ambulance.

She told me that she hoped that having the new child would help her forget her loss. “Life is difficult,” she said. “We all live in fear. Pain is coming from fear. I pray it gets better.”

In October, I flew over Mosul with the Iraqi air force. It was not on a combat run, but on a propaganda mission. Under a bomber’s moon – full and bright – the planes dropped leaflets by the million, sometimes still in their cardboard boxes, from the side doors of a C-130 cargo plane. Below, the land was lit up, roads and buildings illuminated and stretching for miles in the dark. From 17,000 feet, Mosul didn’t look like a city under occupation. It looked alive.

Later, in its industrial suburbs, I found a few of the leaflets in the dirt. Some, at least, had found their target.

“Nineveh, we are coming,” they proclaimed, a promise to Mosul and the surrounding province. They encouraged people to stay away from IS buildings. And the Iraqi government told people not to flee. It feared that there would be a humanitarian crisis if the city, which has more than a million residents, were to empty.

As Mosul’s fight enters its second month, however, services are still largely absent. “The army brought us food and lentils but there’s no government,” said Bushra, a woman from the city of Tikrit who is now trapped in Mosul. “We are living, but [we have] no water or electricity. We sleep at eight. We don’t have any services. I didn’t get my husband’s salary this month. We live off his pension.”

As the men of the Golden Division move through houses and parts of the city, they find more than just IS dead, weapons and supplies. They also discover records of rule. Although the group is cruel and murderous, it keeps tidy books and distributes welfare. We found dozens of the militants’ ledgers, recording payments made to widows, the poor and the sick.

***

Across Iraq, senior military and police commanders complain that Baghdad is not moving fast enough to fill the gaps left by the fighting, and that although they distribute water, food and medicine to local people, their men must come first.

In the war against IS, no city has been bombed more than Mosul. The coalition air strikes come day and night. The only let-up is during bad weather, which also results in ground operations being paused.

According to some monitoring groups, as many as 1,300 civilians have been killed in coalition air strikes so far. Yet it is Islamic State that is doing most of the killing, through executions and sniper and mortar attacks. The militants have murdered and continue to murder hundreds of people inside the city each week.

During one patrol, an IS sniper pinned down the unit I was with inside a house. One by one, the soldiers ran to their armoured vehicles – me among them – and to safety. The bangs sounded especially loud. We soon discovered why. The marksman was firing armour-piercing bullets. One managed to penetrate the turret of a Humvee and the gunner inside it was wounded.

Mosul, the beautiful, once-cosmopolitan centre of northern Iraq, became a mystery under IS. The fighters cut off its contact with the outside world. At the edge of the city, I walked through a former IS workshop. There, between 20 and 30 men had cast and milled mortar shells every day. Thousands of the steel casts remained in piles, waiting to be finished. The roof of the foundry had been peppered with shrapnel. IS had tried to conceal the factory from passing aircraft by burning oil fires through the roof.

It struck me then that the militants had spent their two years in Mosul with one priority in mind: preparing for this battle. Who knew how many mortar shells, filled with explosives, were now inside the city, ready to be fired? This was weapons production on an industrial scale.

“Isis was scared shitless of the Iraqi soldiers. Believe me, we saw. They pissed their pants,” said Alaa, an English teacher who lives near the front line. White flags were hanging from homes along the street. He described to me the past few days of fighting and how the Iraqi special forces had ­arrived in his neighbourhood.

“Now I feel safe, because they are here,” he said. “And if they need any support, all these people will be with them. Even the people who were influenced by the Isis talk, now they are not, because they endured two years of suffering, two years of depravation, two years of killing, mass killing.”

At the mosque across the street from Alaa’s house, males over the age of 13 were being lined up for security screening, to see if they were IS supporters. The soldiers kept their distance, fearful of suicide bombers. The local people carried their identification papers. Some had shaved off their beards but others had not. They did not share Alaa’s optimism, and said they were afraid that IS could return.

***

Safar Khalil’s wound had no time to heal and become a scar. The bright red hole in his chest came from an IS sniper round, his brothers said. A medic tried to plug it with his finger and stabilise him but the damage inside was too great. Safar’s lungs were gone.

He spewed out dark, thick blood. His face was covered in it. And there, in front of me, he died.

Two of his brothers – one a small boy, the other a young man – stood screaming nearby. They had left their home only a few moments earlier to sell eggs. An army sleeping bag was brought to cover Safar’s face. At first, I thought he was a teenager, because the blood and gore made it difficult to tell how old he was. On his right hand, he wore a heavy ring with an amber stone. Afterwards, I learned that he was 26.

They took his body on a cart back to his home. From inside the house, grief exploded. The women, his relatives, tried to run out, fear and rage written on their faces. But it seemed that the sniper was still nearby, so they were pushed back inside and a family member pulled hard on the metal door to keep them contained.

The women’s voices filled the neigh­bourhood. In the middle of the street, looking horribly alone, Safar’s body lay on the cart. It was not yet safe enough to take him to the cemetery.

There are other fronts in the war to retake Mosul: the federal police and army are moving in from the south and may soon retake what is left of the city’s airport. To the west, the Shia militias of Iraq’s Popular Mobilisation Forces have cut off escape routes to Raqqa in Syria and are on top of the IS stronghold of Tal Afar. In the north, several towns and villages have been taken by the Iraqi army’s 16th Division and the Kurdish peshmerga.

But it is in the east that Mosul proper is being cleared of IS militants. Major al-Abeidi’s convoy was hit again the other day. He sent me pictures of his badly damaged Humvee and complained that he had lost the car and spilled his energy drink.

“We’ll be at the river in weeks,” he said confidently. Until then, eastern Mosul and its people will remain in the maelstrom – surviving not in a city, but on a battlefield.

Quentin Sommerville is the BBC’s Middle East correspondent

This article first appeared in the 24 November 2016 issue of the New Statesman, Blair: out of exile