It's time to be honest about who gains from tax cuts

Raising the personal allowance won’t give anything to the lowest-earning five million workers.

The news that George Osborne is likely to match the flagship Liberal Democrat commitment to raise the personal tax allowance to £12.5k in the next parliament is further proof of what became apparent during the conference season: the government’s economic message is jerking awkwardly between painting a bleak account of the years of austerity still to come and sunny promises of major tax cuts just around the corner.

It also clarifies that raising the personal tax allowance (PTA) will remain the tax cut of choice for both sides of the coalition. Which means that it is worth going back over some of the claims made in support of it – not least as some of them are a bit wide of the mark. This is not to say there is no case to be made for having a higher PTA: a tax-free stretch of income has always been an important part of our tax system and raising it clearly has beneficial effects (for instance, it simplifies, improves work incentives for some, and encourages dual-earning). It’s just that sometimes the key arguments made in support of it are often unbalanced or misleading, or both.

It is regularly, for instance, billed as a tax cut targeted at the lowest earners. And, to state the obvious, someone on say £12k – who would benefit - is clearly on a low wage. Yet it’s important to realise that the proposed hike in the PTA from £10k to £12.5k won’t give anything to the lowest-earning 5 million workers in the UK, all of whom will earn less than the £10k threshold come 2015.

More specifically, it’s said that the specific rationale for a further hike in the PTA is to help those on the minimum wage which has fallen sharply in real terms over recent years. Trouble is, more than 60% of those paid the minimum wage – predominantly women - work part-time. Again, they don’t gain. So rooting the whole argument for going to £12.5k in terms of those toiling on the minimum wage is a bit of a stretch.

Another, related, claim is that the point of a larger personal allowance is that it ‘lifts people out of tax’. And self-evidently this is right – in relation to income tax (several million people will have been lifted out of income tax by 2015 due to coalition policy choices). But that’s only part of the story. The coalition has not raised the threshold for National Insurance in the same way (it’s been uprated with inflation for the last 3 three years). It seems to be acceptable that someone on £8k should pay NICs but unacceptable that someone on £12k pays income tax. It’s hard to think of a sensible rationale for this. If tax cuts are the order of the day then raising the NICs threshold would be a far better priority.

At other moments it is argued that the whole point of the tax cut is to help low-income households or families. Again, this is shaky ground. The bulk of the gains from increasing the PTA flow to the top half of the household income distribution. This observation sometimes raises eyebrows but there is no great mystery about it – it simply reflects the fact that there are large numbers in the bottom half of the distribution who don’t work, and there are large numbers who do work but pay no or little income tax. Meanwhile, in the top half of the income distribution there is a much greater preponderance of dual-earning households who gain twice-over from tax cuts.

Indeed, to understand how households, particularly families with children, will benefit from a higher PTA in the next Parliament we need to consider how it will interact with Universal Credit (due to start in 2017). At the moment a tax cut would benefit someone by the same amount regardless of whether or not they are eligible for tax credits. It doesn’t affect their claim. Under Universal Credit this changes. The gains from the tax cut will in large part be offset by a reduction in entitlement to Universal Credit. And this is no small point: millions of families with dependent age children will be on UC. Tax cuts are going to lose much of their potency for a large swath of low to middle income families, it’s just no one has told them. It would be possible to amend Universal Credit to deal with this problem but so far no party has said they will – it costs money.

So raising the tax allowance is not a policy for the very lowest earners. Nor is it a policy for a far smaller number of very highest earners (people on more than roughly £120k, about 0.5 million, get any gains taxed away). But it is a tax cut for the overwhelming majority in between. Some of these will be on low (but not the very lowest) earnings, some in the middle and some near the top: it spreads the gains around which, depending on your point of view, could be a good thing or a bad thing. To put it another way, only a small part of the cost involved in the proposed increase in the PTA – around 10% - comes from lifting those on between £10k and £12.5k out of income tax: it’s expensive mostly because it also gives a tax cut to everyone earning from £12.5k to roughly £120k.

It’s also important to emphasise that how big the gains will really be, and how much it costs the exchequer, will depend crucially on the detail. A policy to raise the personal tax allowance ‘during the next Parliament’ – meaning by 2020 - to the level of the salary of a full-time minimum wage worker in 2015 (c. £12.5k), is a very different thing to committing to move straight to a £12.5k allowance in 2015. And it’s also very different to committing to raise the allowance by 2020 to whatever a minimum wage salary will be at that time.

Finally, it’s worth noting that, as with many policy commitments, there are likely to be unintended consequences. This is because the government has decided to make earning more than the tax allowance an eligibility criteria for some crucial policies – such as to access more generous childcare support, or auto-enrolment into employer pension schemes. This linkage is a truly asinine bit of policy-making. Raise the threshold while sticking to this approach and ever more low-paid part-timers will miss out on vital forms of economic security.

So, yes, let’s debate tax cuts. Given the squeeze on incomes there will inevitably be pressure on all parties to help ease the pressure on households through the tax system. But let’s discuss this in the knowledge of the fiscal hole that still needs to be filled (which will most likely mean tax rises too). And, crucially, let’s be candid about who really gains from these proposals.

Gavin Kelly is chief executive of The Resolution Foundation

George Osborne arrives at Number 10 Downing Street with his special adviser Rupert Harrison on 7 October 2013. Photograph: Getty Images.

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

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Is defeat in Stoke the beginning of the end for Paul Nuttall?

The Ukip leader was his party's unity candidate. But after his defeat in Stoke, the old divisions are beginning to show again

In a speech to Ukip’s spring conference in Bolton on February 17, the party’s once and probably future leader Nigel Farage laid down the gauntlet for his successor, Paul Nuttall. Stoke’s by-election was “fundamental” to the future of the party – and Nuttall had to win.
 
One week on, Nuttall has failed that test miserably and thrown the fundamental questions hanging over Ukip’s future into harsh relief. 

For all his bullish talk of supplanting Labour in its industrial heartlands, the Ukip leader only managed to increase the party’s vote share by 2.2 percentage points on 2015. This paltry increase came despite Stoke’s 70 per cent Brexit majority, and a media narrative that was, until the revelations around Nuttall and Hillsborough, talking the party’s chances up.
 
So what now for Nuttall? There is, for the time being, little chance of him resigning – and, in truth, few inside Ukip expected him to win. Nuttall was relying on two well-rehearsed lines as get-out-of-jail free cards very early on in the campaign. 

The first was that the seat was a lowly 72 on Ukip’s target list. The second was that he had been leader of party whose image had been tarnished by infighting both figurative and literal for all of 12 weeks – the real work of his project had yet to begin. 

The chances of that project ever succeeding were modest at the very best. After yesterday’s defeat, it looks even more unlikely. Nuttall had originally stated his intention to run in the likely by-election in Leigh, Greater Manchester, when Andy Burnham wins the Greater Manchester metro mayoralty as is expected in May (Wigan, the borough of which Leigh is part, voted 64 per cent for Brexit).

If he goes ahead and stands – which he may well do – he will have to overturn a Labour majority of over 14,000. That, even before the unedifying row over the veracity of his Hillsborough recollections, was always going to be a big challenge. If he goes for it and loses, his leadership – predicated as it is on his supposed ability to win votes in the north - will be dead in the water. 

Nuttall is not entirely to blame, but he is a big part of Ukip’s problem. I visited Stoke the day before The Guardian published its initial report on Nuttall’s Hillsborough claims, and even then Nuttall’s campaign manager admitted that he was unlikely to convince the “hard core” of Conservative voters to back him. 

There are manifold reasons for this, but chief among them is that Nuttall, despite his newfound love of tweed, is no Nigel Farage. Not only does he lack his name recognition and box office appeal, but the sad truth is that the Tory voters Ukip need to attract are much less likely to vote for a party led by a Scouser whose platform consists of reassuring working-class voters their NHS and benefits are safe.
 
It is Farage and his allies – most notably the party’s main donor Arron Banks – who hold the most power over Nuttall’s future. Banks, who Nuttall publicly disowned as a non-member after he said he was “sick to death” of people “milking” the Hillsborough disaster, said on the eve of the Stoke poll that Ukip had to “remain radical” if it wanted to keep receiving his money. Farage himself has said the party’s campaign ought to have been “clearer” on immigration. 

Senior party figures are already briefing against Nuttall and his team in the Telegraph, whose proprietors are chummy with the beer-swilling Farage-Banks axis. They deride him for his efforts to turn Ukip into “NiceKip” or “Nukip” in order to appeal to more women voters, and for the heavy-handedness of his pitch to Labour voters (“There were times when I wondered whether I’ve got a purple rosette or a red one on”, one told the paper). 

It is Nuttall’s policy advisers - the anti-Farage awkward squad of Suzanne Evans, MEP Patrick O’Flynn (who famously branded Farage "snarling, thin-skinned and aggressive") and former leadership candidate Lisa Duffy – come in for the harshest criticism. Herein lies the leader's almost impossible task. Despite having pitched to members as a unity candidate, the two sides’ visions for Ukip are irreconcilable – one urges him to emulate Trump (who Nuttall says he would not have voted for), and the other urges a more moderate tack. 

Endorsing his leader on Question Time last night, Ukip’s sole MP Douglas Carswell blamed the legacy of the party’s Tea Party-inspired 2015 general election campaign, which saw Farage complain about foreigners with HIV using the NHS in ITV’s leaders debate, for the party’s poor performance in Stoke. Others, such as MEP Bill Etheridge, say precisely the opposite – that Nuttall must be more like Farage. 

Neither side has yet called for Nuttall’s head. He insists he is “not going anywhere”. With his febrile party no stranger to abortive coup and counter-coup, he is unlikely to be the one who has the final say.