Fleecing the poor is not the best way to fight poverty
Published 10 April 2008
The New Statesman leader this week looks at the way tax under Labour is redistributing from the poorest
The severe dip in the Prime Minister's poll rating is, paradoxically, a direct consequence of the triumphalist flourish with which, as chancellor, he signed off his final Budget a year ago. The grand announcement at the end of his 2007 Budget speech - that from April 2008 he would be cutting 2p in the pound off the basic rate of income tax - was intended to secure his lasting reputation as a prudent genius. At the time it was greeted with whoops and foot-stamping from colleagues. Wreathed in smiles, Gordon Brown could hardly contain his pride.
Which, as we know, comes before a fall. Late in the day, Labour's backbenchers have woken up to the consequences of the chancellor's sleight of hand. As the new tax year begins, it has become impossible to ignore that the much-lauded cut from 22p to 20p in the basic rate of tax came hand in hand with a rather less trumpeted scrapping of the 10p starter rate. What that means is that, from the beginning of this tax year, income previously taxed at 10p will be taxed at 20p. Thus, the more you earn, the more you will benefit. According to the Institute for Fiscal Studies, some 5.3 million families earning between £5,400 and £18,500 a year will be worse off. MPs, particularly those in constituencies with large numbers of low earners, now see the 2p giveaway for what it was: a mean-spirited transfer from the poorest to the better-off. Peter or Petra, struggling in the lower deciles of minimum-wage territory, have been robbed to pay mid-decile Paul or Paula.
Even the Labour-dominated Commons Treasury committee is critical. Removing the 10p rate will disadvantage 800,000 single earners with incomes below £18,500, who are less protected by tax or pension credits than families which include children or pensioners. This worst-hit group was an "unreasonable target for raising additional revenues", it said. So far Labour's front bench has resisted appeals to repair the damage through amendments to the Finance Bill. They repeat the mantra that Labour has lifted millions out of poverty and that most families benefited from the 2p tax cut.
Labour's fight against child poverty and its protection of the over-65s (who will also soon benefit from the long-awaited linking of pensions to average earnings) are certainly to be celebrated. But it is deeply disheartening that, in one of the world's richest countries, a Labour government dare not ask top earners to contribute more towards protecting the poor and instead robs those who live on what the Joseph Rowntree Foundation calls the "breadline economy". This is saying to low-earning men and women that, however hard they work, they are less deserving than pensioners or parents. It is discriminatory.
The 2p cut has left Labour with few options. The basic tax rate having been reduced, no chancellor (of any party) will have the courage to restore it in the near future. The only way Labour can now repair the damage would be to restore the 10p band and raise the threshold for paying it.
But the tax system cannot by itself resolve the problem of persistent poverty in Britain. The global labour market produces gross inequalities in earnings and remains virtually unregulated.
Since coming to power, new Labour has made a fetish of being, in Peter Mandelson's words, "very relaxed" about the high pay of the richest. But it is also showing itself almost as relaxed about the low pay of the poorest. The minimum wage goes up in pitifully small increments, with the result that almost everyone on the current £5.52 an hour requires state top-ups. A single person working a 35-hour week is entitled to a state credit of more than £20 a week, virtually a direct government subsidy into the pockets of low-paying employers. If those who work hard are to be raised out of persistent poverty, the minimum wage must be increased steadily for the next few years above the rate of inflation. Donald Hirsch, on page 35, makes a similar point about those dependent on benefits.
Labour can be proud of its continuing efforts to eradicate child and pensioner poverty, but it cannot do this at the expense of the poorest. Gordon Brown's 2p gimmick will come back to haunt him if he fails to recognise this.
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