Show Hide image

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.

A

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.

N

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?

DAVID YOUNG FOR NEW STATESMAN
Show Hide image

An English tragedy: how Boris, Dave and Brexit were formed by Eton college

It's said that the Battle of Waterloo was won on the playing fields of Eton. Was Britain's relationship with Europe wrecked there?

The brief window in which it was cool to be an Etonian has closed. That period was marked not just by Etonian success and visibility – in politics, on the stage, in the media, even on the balcony of Buckingham Palace – but also by a new-found unabashedness in expressing pride at having attended King Henry VI’s Thames-side ­college, founded for 70 poor scholars in 1440. David Cameron summed it up when he said he was “not embarrassed” that he had gone to “a fantastic school . . . because I had a great education and I know what a great education means”.

All this was quite strange and ­perturbing to me, as an alumnus of an older era, the 1970s, when being an Etonian seemed decidedly uncool. When asked which school we had attended, my contemporaries and I muttered that we had been to a comprehensive near Slough. It was perturbing because I always had my doubts about Etonian confidence, or arrogance.

The closing of this window can be dated precisely to the early hours of the morning of 24 June. At that moment, it became clear that David Cameron had taken an insouciant, arrogant and disastrous gamble, in the interests of maintaining Conservative Party unity, by calling an unnecessary referendum on Britain’s membership of the European Union that he believed he was sure to
win. The window closed even more tightly a week later, when Boris Johnson, having helped to lead the Leave campaign, suddenly declared that he was no longer standing for the Tory leadership – the glittering prize for which he had apparently abandoned his principles and betrayed his friends.

If the Battle of Waterloo had been won on the playing fields of Eton, it now appeared that Britain’s relationship with Europe, and even its continued integrity as a nation, had been wrecked there. It was no surprise that there should be a turning against Eton, with gleeful opinion pieces from the left-leaning commentariat mocking everything from Tom Hiddleston’s backside to the commitment to public service of one of our ablest MPs, Jesse Norman.

I find this reaction as shallow as the ­excessive pride that preceded it. Maybe that is not surprising, as I both love and feel dissatisfied, even disappointed, by the school where I spent five years of my boyhood and then two and a half years teaching English literature as a young adult. The feeling of let-down is more than personal. Eton has something to answer for, at a national level. A few years ago, I wrote these words: “I’ve often wondered whether this famous Eton confidence could be skin-deep: certainly people such as Boris Johnson and David Cameron do not lack chutzpah, but the confidence to believe you deserve the high position does not necessarily mean you possess the other talents – humility, for instance, and the ability to listen to others – needed to honour it.” Now the 11 Eton pupils who managed to secure an interview with Vladimir Putin have trumped even Cameron and Johnson
in the chutzpah department, but not necessarily added lustre to their alma mater.

I had a chance to reassess the ambivalence I feel about Eton, and to reflect on the role that this ancient and eccentric place has played in our national crisis, when I attended a reunion at my old school just three days after the dark night of 23 June.

This was not a reunion of old boys but a celebration of the 50th anniversary of the Eton English department, an institution for which I feel affection and profound gratitude. As a boy, I was inspired not only to read voraciously and widely – the novels of Thomas Hardy, Henry James, Dickens, William Faulkner; the poetry of Coleridge, Wordsworth, Emily Dickinson, T S Eliot, Charles Causley, Louis MacNeice, Henry Vaughan; Shakespeare at his most intense – but also to analyse, think and feel simultaneously. Alan Paton’s Cry, the Beloved Country and Dickens’s Hard Times opened my eyes to conditions as far from my comfortable Home Counties upbringing as you could imagine, to the realities of racial segregation and working-class ­deprivation; opened my heart, too, I hope.
I was being challenged to reflect on my privilege, even be discomfited by it – not just blindly perpetuate it.

For those reasons, I was honoured to be invited back to teach, initially for just a year, in the department that had given me so much mind-and-soul nourishment. I was not the most confident or organised of teachers, but pupils I bumped into years later said they had enjoyed and gained something from classes in which discipline was not always the tightest. A debate I set up to discuss the miners’ strike turned into a riot. Above all, I enjoyed directing motivated and talented boys in productions of Journey’s End and Death of a Salesman which moved audiences.

***

Inspiration, warmth and a streak of anarchy are, perhaps, not the qualities you associate with Eton. But they were present in the English department, which started as a sort of anti-establishment challenge to the hegemony of classics. Angus Graham-Campbell, my laconic head of department, summed up the department’s signature virtues as scholarship, exuberance and irreverence.

The English department was not exactly typical of Eton as a whole. It was, I suppose, the haven for sensitive and artistic souls, for subversives and mavericks. Eton had other, for me less attractive, sides. I particularly disliked Pop, the self-elected club of prefects who strutted their stuff and lorded it over underlings in brightly embroidered waistcoats – the club to which Boris Johnson (but not David Cameron) belonged. This was more Game of Thrones than “The Love Song of J Alfred Prufrock”.

Eton, above all, was intensely male, intensely hierarchical and intensely competitive. Like Boris, I was a King’s Scholar; successors of the original 70 poor scholars, we lived apart from other Etonians in ancient quarters close to the 15th-century chapel, wore gowns and competed more for academic honours than for social kudos. Like Boris, I won the Newcastle Scholarship in classics and divinity, a strange 19th-century leftover that involved composing verses in Greek iambics, reading the Gospel of Matthew and the Acts of the Apostles in Greek and answering a paper on the doctrine of the Atonement – all in the term before A-levels.

I was proud of my academic achievements. But having had a chance to reflect on the Etonian male culture of competition from the outside, and then seeing it from a different angle when I went back to teach there, I began to doubt how healthy it was. I realised that coming top of the form and winning prizes had mattered far too much to me. It had even affected my choice of A-levels; I was good at classics and felt fairly confident of being the biggest fish in that smallish pond, rather than swimming in the broader waters of history and modern languages. Surely what mattered was finding yourself, your passion and your vocation?

I was artistically minded and Eton provided wonderful opportunities in drama (the groundwork was being laid for the flowering of acting talent we have seen recently) and music; but “creative writing” and painting, encouraged up to the age of 14, were suddenly put away as childish things when you reached adolescence (this, mind you, is not unique to Eton). From the age of 15, I never even considered choosing to go to music, art or drama school rather than taking the well-worn path to an Oxbridge scholarship. Achieving that seemed to be the pinnacle of Etonian success, and the only thing my worldly housemaster ever cared about.

Certainly no one talked much about happiness or emotional health. Eton’s pastoral care seemed close to non-existent. I kept my unhappiness to myself, with unhelpful consequences. For four of my contemporaries in college, who committed suicide in their late teens or twenties, the consequen­ces were more dire.

This may be sounding too much like a personal lament, or a reprise of Cyril Connolly’s theory of permanent adolescence in Enemies of Promise. I found my way eventually to what I wanted to be and do (it involved a lot of psychotherapy and a wonderfully liberating year in Barcelona). But I think my criticisms of Eton have a bearing on our national tragedy.

The atmosphere at the Eton English department celebration a few weeks ago did not lack the appropriate exuberance and irreverence, and the setting in the provost’s garden, surrounded with sculptures by Rodin, Jacob Epstein and Henry Moore, was exquisitely beautiful. Yet I could not help sensing the unquiet ghosts of Dave and Boris stalking the corridors behind us. I imagined them locked in an immature male rivalry that has ended up inflicting incalculable damage on a nation. Now Dave has decided to quit the political stage, leaving rather little in the way of legacy behind him.

Perhaps Boris, the King’s Scholar, could not forgive Dave for winning the ultimate prize. However, in taking revenge, he found himself hoist with his own petard, before somehow managing to emerge with a lesser prize, which some see as a ­poisoned chalice.

It all made me think of that supremely pointless sport, the Eton wall game. I played once or twice before giving up, repelled by the sheer unpleasantness of being ground into either brick or mud, and the tedium of a game in which the last goal had been scored in 1909. As a Colleger, though, I supported our team of brainboxes, drawn from the 70 scholars to play against the brawn of the Oppidans (the rest of the school, 1,200 of them). No doubting that it was antler-to-antler stuff, or like the contests of male musk oxen that knock each other senseless.

Eton remains archaic in its attitude towards women. It is still a boys-only boarding school (though a small number of girls, mainly the daughters of teachers, have been pupils there), and the staff are overwhelmingly male. Being largely cut off from women and girls for much of your boyhood and adolescence does not seem to me an ideal recipe for emotional health, or for regarding women as equals.

The school that has educated 19 prime ministers may provide a brilliant academic education and countless other opportunities, but it can leave its pupils emotionally floundering behind a façade of polish and charm. The effects of that emotional impoverishment can be far-reaching indeed. I am encouraged that the new headmaster, Simon Henderson, has signalled a change of tone at Eton, with more stress on “emotional intelligence” and “mental health”. That change is long overdue.

Harry Eyres is the author of “Horace and Me: Life Lessons from an Ancient Poet”, published by Bloomsbury

This article first appeared in the 15 September 2016 issue of the New Statesman, The fall of the golden generation