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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?

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Jeremy Corbyn and the paranoid style

The Labour leader’s team has a bunker mentality, and their genius has been to extend that bunker to accommodate tens of thousands of their followers. Within that bubble, every failure becomes a victory.

 

There was an odd moment on the BBC last summer, during Jeremy Corbyn’s first leadership campaign. A reporter had asked him a simple question about nationalisation: “Where did you get these words from?” he snapped. “Has somebody been feeding you this stuff?” 

At the time I was taken aback, but before long the campaign would become defined by paranoia, manifested in its leader as an extreme suspicion of “mainstream media”, and in its supporters as a widespread belief that establishment forces were conspiring to “fix” the Labour leadership contest, the so-called #LabourPurge.

This summer, Corbyn is fighting another leadership election. The main focus of his campaign so far has been an attempt to paint his rival Owen Smith as a “Big Pharma shill”, while Corbyn’s most influential supporter, Unite’s Len McCluskey, has claimed that MI5 are waging a dirty tricks campaign against the Leader of the Opposition. On stage Corbyn has attacked national media for failing to cover a parish council by-election.  

Corbyn’s time as Labour leader has been marked by an extraordinary surge of paranoia and conspiracy theory on the left. The sheer intensity of it, combined with some of his supporters’ glassy-eyed denial of reality and desire to “purge” the party unfaithful, has led some to compare Corbynism to a cult or a religious movement. Unfortunately, the problem goes much deeper. Corbyn didn’t create or lead a movement; he followed one.

In the last few years, a new breed of hyperbolic pundits has emerged on left-wing social media who embody what Richard Hofstadter called “The Paranoid Style” in politics, “a sense of heated exaggeration, suspiciousness, and conspiratorial fantasy”.

Hofstadter’s 1964 essay was inspired by McCarthyism, but the Paranoid Style as a political and psychological phenomenon has been with us for as long as modern politics. Of course conspiracies and misdeeds can happen, but the Paranoid Style builds up an apocalyptic vision of a future driven entirely by dark conspiracies. The NHS won’t just be a bit worse; it will be destroyed in 24 hours. Opponents aren’t simply wrong, but evil incarnate; near-omnipotent super-villains control the media, the banks, even history itself. Through most of history, movements like this have remained at the fringes of politics; and when they move into the mainstream bad things tend to happen.

To pick one example among many, science broadcaster Marcus Chown’s Twitter feed is full of statements that fall apart at the slightest touch. We learn that billionaires control 80 per cent of the media – they don’t. We learn that the BBC were “playing down” the Panama Papers story, tweeted on a day when it led the TV news bulletins and was the number one story on their news site.  We learn that the Tories are lying when they say they’ve increased spending on the NHS. As FullFact report, the Tories have increased NHS spending in both absolute and real terms. We learn via a retweet that Labour were ahead of the Conservatives in polling before a leadership challengethey weren’t.

The surprise Conservative majority in last year’s election shocked the left to the core, and seemed to push this trend into overdrive. Unable to accept that Labour had simply lost arguments over austerity, immigration and the economy, people began constructing their own reality, pasting out of context quotes and dubious statistics over misleading charts and images. Falsehoods became so endemic in left-wing social media that it’s now almost impossible to find a political meme that doesn’t contain at least one serious mistruth. Popular social media figures like Dr Eoin Clarke have even built up the idea that the election result itself was a gigantic fraud.

The problem with creating your own truth is that you have to explain why others can’t – or won’t – see it. One answer is that they’re the unwitting stooges of an establishment conspiracy that must involve the “mainstream media”, a belief that seems more plausible in the wake of scandals over expense claims and phone-hacking. Voters can’t be expressing genuine concerns, so they must have been brainwashed by the media.  

The left have long complained about the right-wing bias of the tabloid press with some justification, but in recent years the rage of a hardcore minority has become increasingly focused on the BBC. “Why aren’t the BBC covering X” is a complaint heard daily, with X nearly always being some obscure or unimportant protest or something that in fact the BBC did cover.  

Bewildered and infuriated by the BBC’s refusal to run hard-left soundbites as headlines, the paranoid left assume Auntie is involved in some sort of right-wing establishment plot. Public figures such as Laura Kuenssberg, the Corporation’s political editor, have been subjected to a campaign of near-permanent abuse from the left, much of it reeking of misogyny. By asking Labour figures questions as tough as those she routinely puts to Conservative politicians, she has exposed her true role as a “Tory propagandist whore”, a “fucking cunt bag”, or a “Murdoch puppet”.

This was the context in which Corbyn’s leadership campaign was fought, and with his own dislike of the media and love of a good conspiracy theorist, he swiftly became a figurehead for the paranoid left. Suddenly, the cranks and conspiracy theorists had a home in his Labour party; and they flocked to it in their tens of thousands. Of course most Corbynistas aren’t cranks, but an intense and vocal minority are, and they have formed a poisonous core at the heart of the cause.

The result is a Truther-style movement that exists in almost complete denial of reality. Polls showing double-digit leads for the Conservatives are routinely decried as the fabrications of sinister mainstream media figures. The local elections in May, which saw Corbyn’s Labour perform worse than most opposition leaders in recent history, triggered a series of memes insisting that results were just fine. Most bewildering of all is a conspiracy theory which insists that Labour MPs who quit the shadow cabinet and declared ‘no confidence’ in Corbyn were somehow orchestrated by the PR firm, Portland Communications.

The paranoid left even has its own news sources. The Canary manages, without irony, to take the worst traits of the tabloids, from gross bias to the misreporting of a suicide note, and magnify them to create pages of pro-Corbyn propaganda that are indistinguishable from parody. On Facebook, Corbyn has more followers than the Labour Party itself. Fan groups filter news of Corbyn and his enemies so effectively that in one Facebook group I polled, more than 80 per cent of respondents thought Corbyn would easily win a general election.

This kind of thinking tips people over a dangerous threshold. Once you believe the conspiracy theories, once you believe you’ve been denied democracy by media manipulation and sinister establishment forces mounting dirty tricks campaigns, it becomes all too easy to justify bad behaviour on your own side. It starts with booing, but as the “oppressed” gain their voices the rhetoric and the behaviour escalate until the abuse becomes physical.

I’m prepared to believe Jeremy Corbyn when he says that he doesn’t engage in personal abuse. The problem is, he doesn’t have to. His army of followers are quite happy to engage in abuse on his behalf, whether it’s the relentless abuse of journalists, or bricks tossed through windows, or creating what more than 40 women MPs have described as a hostile and unpleasant environment

Supporters will point out that Jeremy Corbyn hasn’t asked for this to happen, and that in fact he’s made various statements condemning abuse. They’re not wrong, but they fail to grasp the point; that the irresponsible behaviour of Corbyn and his allies feeds into the atmosphere that leads inexorably to these kinds of abuses happening.

We see this in Corbyn’s unfounded attacks on media conspiracies, such as his absurd complaints about the lack of coverage of council elections. We see it in the shadow chancellor John McDonnell’s angry public jibes at Labour MPs. Surly aggression oozes out of the screen whenever a TV reporter asks Corbyn a difficult question. Then there’s the long history of revolutionary rhetoric – the praise for bombs and bullets, the happy engagement with the homophobic, the misogynistic, the anti-Semitic, the terrorist, in the name of nobler aims. 

Even the few statements Corbyn makes about abuse and bigotry are ambiguous and weak. Called upon to address anti-Semitism in the Labour party, he repeatedly abstracts to generic racism – in his select committee evidence on the topic, he mentioned racism 28 times, and anti-Semitism 25 times, while for his interviewers the ratio was 19 to 45. Called on to address the abuse of women MPs in the Labour Party, he broadened the topic to focus on abuse directed at himself, while his shadow justice secretary demanded the women show “respect” to party members. Corbyn’s speech is woolly at the best of times, but he and his allies seem determined to water down any call for their supporters to reform.   

Still, why reform when things are going so well? Taken at face value, Corbyn’s summer has been appalling. It began with the poor local election results, continued with Labour’s official position being defeated in the EU Referendum, and then saw the party’s leader lose a vote of no confidence, after which he was forced to watch the resignation of most of his shadow cabinet and then face a leadership challenge. Labour are polling terribly against Theresa May (who, admittedly, is in her honeymoon period), and the press are either hostile or find Corbyn impossible to work with.

If Corbyn were a conventional Leader of the Opposition these facts would be catastrophic, but he’s not and they’re not. To understand why, let’s look at some head-scratching quotes from leading Corbynistas. Jon Lansman, Chair of Momentum, was heavily mocked on Twitter recently for saying, “Democracy gives power to people, ‘Winning’ is the small bit that matters to political elites who want to keep power themselves.” The former BBC and Channel 4 journalist Paul Mason released a video clip suggesting Labour should be transformed into a “social movement”, along the lines of Occupy.  

These sentiments are echoed at the heart of Team Corbyn. Owen Smith claimed to have asked Corbyn and his Shadow Chancellor, John McDonnell, whether they were prepared to let the Labour party split. According to Smith, whose version of events was denied by John McDonnell but backed up by two other MPs, Corbyn refused to answer while McDonnell said “if that’s what it takes”. Many activists seem to hold the same view – Twitter is full of Momentum warriors quite happy to see the bulk of the PLP walk away, and unconcerned about their diminishing prospects of winning any election.

Which on the face of it makes no sense. Labour has 232 seats, considerably more than David Cameron inherited in 2005. Their opponent is an “unelected” Prime Minister commanding a majority of just twelve, who was a senior figure in the government that just caused Britain’s biggest crisis since the war, and is now forced to negotiate a deal that either cripples the economy or enrages millions of voters who were conned by her colleagues into believing they had won a referendum on immigration. Just before leaving office, George Osborne abandoned his budget surplus target – effectively conceding it was a political gambit all along.

A competent Labour leader, working with other parties and disaffected Remainian Tories, could be – should be - tearing lumps out of the government on a weekly basis. Majority government may be a distant prospect, but forcing the Tories into a coalition or removing them from government altogether by the next election is entirely achievable.  Yet it’s fair to say that many Corbynistas have little interest in seeing this scenario play out.

Which makes sense, because to these people Labour – real Labour – doesn’t have 232 seats, it has about 40. The others seats are occupied by “Red Tories” or, worse, “Blairites”. Since these groups are as much the enemy as the Tories are, exchanging one for the other is meaningless. The Corbynites could start their own party of course, but why do that when they can seize control of Labour’s infrastructure, short money and institutional donors. The only long-term strategy that makes sense is to “purify” Labour, and rebuild from the foundations up. That may mean another 10 or 20 years of Tory rule, but the achingly middle-class Corbynistas won’t be the ones to suffer from that.

Seen through that prism, Corbynism makes sense. A common theme among the dozens of resignation letters from former shadow ministers has been his apparent disinterest in opposition policy work. A recent Vice documentary showed his refusal to attack the Tories over the resignation of Iain Duncan Smith. Even Richard Murphy, a supportive economist who set out many of the basic principles of ‘Corbynomics’, lost patience in a recent blog post

“I had the opportunity to see what was happening inside the PLP. The leadership wasn’t confusing as much as just silent. There was no policy direction, no messaging, no direction, no co-ordination, no nothing. Shadow ministers appeared to have been left with no direction as to what to do. It was shambolic.”

So where are his attentions focused? Unnamed “insiders” quoted in the Mirror paint an all too feasible picture of a team that, “spent hours in ‘rambling’ meetings discussing possible plots against him and considered sending ‘moles’ to spy on his Shadow Cabinet.” That claim was given more weight by the recent controversy over Karie Murphy, Corbyn’s office manager, who allegedly entered the office of shadow minister Seema Malhotra without permission. Vice’s documentary, ‘The Outsider‘, showed Corbyn railing against the BBC, who he believed were ‘obsessed’ with undermining his leadership, and other journalists.

By all accounts, Corbyn’s team inhabit a bunker mentality, and their genius – intentional or otherwise – has been to use the ‘paranoid style’ to extend that bunker to accommodate tens of thousands of their followers. Within that bubble, every failure becomes a victory. Negative media coverage simply reinforces their sense of being under attack, and every bad poll or election disappointment becomes an opportunity to demonstrate the strength of their faith. Shadow cabinet resignations and condemnations reveal new ‘traitors’, justifying further paranoia and increasing the feeling of being under siege.

It’s terrible for a functioning opposition, but brilliant for forming a loyal hard-left movement, driving screaming protestors into CLP meetings, keeping uppity MPs in line with the prospect of more abuse or deselection, and ensuring that Corbyn will sign up enough supporters to win the leadership election by a landslide.  

Hofstadter wrote that ”the paranoid is a militant leader. He does not see social conflict as something to be mediated and compromised, in the manner of the working politician.” In the United States, Bernie Sanders was ultimately forced to compromise when Hillary Clinton won the Democrat nomination. The Bernie Corbyn & Jeremy Sanders Facebook group, hardcore loyalists to the end, immediately disowned him, and suggested the group change its name.

Corbyn need make no such compromise, which is his whole appeal. Those who expect him to step down after a general election defeat, or to compromise with the rest of the party to achieve greater success, have completely failed to understand what they’re dealing with. For Corbyn and his followers there is no compromise, only purity, and a Red Labour party with 50 MPs is better than a centrist party with 400. That is the reality of the movement that Labour and the left are facing, and it is catastrophic. 

 

Martin Robbins is a Berkshire-based researcher and science writer. He writes about science, pseudoscience and evidence-based politics. Follow him on Twitter as @mjrobbins.