Tory MPs' bad advice to Osborne: don't cut taxes for the poor

Those Tories calling for an increase in the 40p tax threshold should remember that only the top 14 per cent of earners pay the rate.

George Osborne delivers a speech at Peking University in Beijing on October 14, 2013. Photograph: Getty Images.

After Nick Clegg's call for a "workers' bonus" in the form of a £500 increase in the income tax threshold to £10,500 (a suggestion likely to be taken up by George Osborne), the Free Enterprise Group of Tory MPs have issued their own demands to the Chancellor. 

In today's Times, Dominic Raab, one of the group's leading members, rightly notes that Clegg's proposal would not benefit the five million lowest-earners who do not pay income tax. But rather than suggesting progressive alternatives such as cutting VAT, or raising the National Insurance threshold (which currently stands at £7,748), he and others argue for tax cuts to be focused on "the middle classes". 

Nick de Bois comments: "If there’s going to be any reduction in the burden of taxation in the Budget, we should be looking at the squeezed middle, by raising the threshold into which people start paying the higher rate of tax. " Another Tory MP, Steve Barclay says: "We also need to be clear on what delivers the best bang for the buck, which includes not losing sight of the squeezed middle. It seems too much of the tax cutting is focused solely on those at the lowest end of the earnings spectrum."

But while living standards are falling across the income scale, it's worth noting that those who earn enough to pay the 40p tax rate (£41,451) are in the top 14 per cent of earners. It's those who earn around the median full-time salary of £26,500 who are the real squeezed middle. For both political and economic reasons, it makes sense to target tax cuts on the bottom half of the income scale. The poor are more likely to spend, rather than save, any gains they receive (stimulating the economy as a result) and the greatest challenge facing the Tories is need to win over this group, a point well made by Blue Collar modernisers such as Robert Halfon and Guy Opperman. 

The Tories should also be wary of Raab's call to "halve the number of Whitehall departments, strictly enforce public sector pay limits and introduce a three-year cash freeze on non-pension benefits." 

In his most recent Budget, George Osborne extended the 1% cap on public sector pay increases until 2015-16, entailing further real-terms cuts for workers. But with the return of growth, such austerity will become harder to justify; voters will want their share of an expanding cake.

If the Tories want to win over the voters they will need to remain the largest party in 2015, they would be wise to offer some relief to the public sector. As Renewal, the Conservative group aimed at broadening the party's appeal among working class, northern and ethnic minority voters, has noted, the majority of Tory target seats have a higher than average share of public sector workers, including 60% of Labour-held targets and half of the top 20 Lib Dem-held targets. While the Tories are likely to pledge to cut taxes for all workers, in the form of a £12,500 personal allowance, they should also consider easing the squeeze on the public sector.