Nick Clegg speaks at the Liberal Democrat spring conference in York last weekend. Photograph: Getty Images.
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Why the Lib Dems' £12,500 tax allowance promise is a smaller pledge than it sounds

Inflation alone will ensure that the allowance rises to over £11.3k and minimum wage workers will still be paying tax.

Since the weekend, when the Lib Dem faithful gathered in York for their spring conference, quite a few column inches have been filled with frothy speculation about Nick Clegg’s likely longevity as Liberal Democrat leader. Nothing, however, has been written about the new twist he gave their proposed tax policy (Lib Dem blogger Mark Pack being the honourable exception). Clegg’s remarks may have sounded like a passing aside – but they were fiscally and politically significant.

The context was that Clegg – like Danny Alexander – spent the weekend seeking to highlight the Lib Dems' flagship commitment to remove minimum wage workers from income tax in the next Parliament via a personal tax allowance (PTA) of £12,500. The not-very-hidden-message was that this will be top of their demands in any future coalition talks.

It is an odd policy in many ways. I’ve written before about why it isn’t what it’s billed to be. It’s not a tax cut for the lowest paid (the 5 million lowest earners don’t’ get a penny); nor is it really about lifting people out of income tax (roughly 10 per cent of the cost of the policy goes on this). It isn’t targeted at those on the minimum wage (the clear majority of whom are part-time workers who don’t pay income tax); and it’s certainly not well designed to reach those fabled "hard working families" (just 15 per cent of the gain goes to working families in the bottom half of the income distribution). In a world of Universal Credit (UC), it’s an even more regressive than people realise: millions of low and middle income working families will have most of their gains immediately withdrawn via a lower UC entitlement. And there is no policy justification whatsoever for raising the PTA once again while leaving the national insurance threshold at a far lower level – a point that even senior Lib Dems concede in private. But none of this is new.   

What might have been news, however, was Clegg’s apparent clarification that the aim of Lib Dem policy for the next Parliament is to “stick at £12.5k” (£12.5k being around the earnings of a full-time minimum wage worker in 2015). I’m told this really means setting the goal of a PTA of £12.5k by the end of the Parliament in 2020; in exactly the same way that in 2010 Clegg made an allowance of £10k the lodestar for 2015.

The details really matter here. Reaching an allowance of £12.5k by 2020 is very much less ambitious than moving straight to a PTA of £12.5k in 2015/16, and dramatically less stretching than committing to uprate a £12.5k allowance in line with increases in the minimum wage over the next Parliament (which is the implied logic of the policy). Even without further increases in the PTA in next week’s Budget, or indeed in Budget 2015, we would expect inflation alone to ensure that the allowance rises to over £11.3k by 2020 (the default for the PTA is that it rises in line with CPI). Inflation is the friend of those seeking to boast of a higher income tax allowance.

The extra cost of going from £11.3k to £12.5k by 2020 is about £6bn over the next Parliament (more if UC doesn’t come in). But moving straight to a PTA of £12.5k in 2015/16 would cost over double this amount. And uprating a £12.5k allowance in line with the minimum wage would cost far more still. Indeed, Clegg’s remarks suggests he’s realised that this continued link to the minimum wage, the stated justification for choosing £12.5k in the first place, would not only cost an exorbitant amount, but it would also mean that the Low Pay Commission (who determine the minimum wage) would in effect be in charge of a central element of tax and fiscal policy. And that was never going to happen.

So the defining commitment at the heart of the Lib Dem manifesto is actually likely to be to raise the PTA by a bit over a thousand pounds more than it would have otherwise gone up by over the whole of the next Parliament. Regardless of whether you think this is a smart or silly thing to promise, what is beyond doubt is that it is a smaller pledge than many realise. (And it’s also a different pledge to that being advertised: a £12.5k PTA in 2020 would mean a full-time minimum wage worker will still be paying income tax in every year of the next parliament.) 

Now, £6bn over the Parliament is still an awful lot of money. All the more so when most of the gains go to those households who are better off, and more than ever in a period of sustained austerity when every taxcut will require another tax rise or, more likely, yet deeper spending cuts that will overwhelmingly hit the poor. But the lower than expected cost is highly relevant to potential 2015 coalition talks. It means the Lib Dem tax plans are likely to represent a less insurmountable barrier to a deal with either of the other main parties than some might think. Clegg seems to have watered down his top demand for future coalition talks without anyone noticing.   

Gavin Kelly is chief executive of the Resolution Foundation 

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

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Jeremy Corbyn vows not to resign. What next for Labour?

The leader's decision to fight the rebels sets the stage for a new leadership contest or a protracted legal battle.  

Throughout Sunday as the shadow cabinet resignations mounted up (reaching 11 by the evening), Jeremy Corbyn's allies insisted that he was unfazed. "He's not wavering," one told me, adding that Corbyn would seek to form a new frontbench. At 21:54pm, the Labour leader released a statement confirming as much. "I regret there have been resignations today from my shadow cabinet," Corbyn said. "But I am not going to betray the trust of those who voted for me - or the millions of supporters across the country who need Labour to represent them."

Corbyn added that "those who want to change Labour's leadership" would "have to stand in a democratic election, in which I will be a candidate". The shadow cabinet, he said, would be reshaped "over the next 24 hours" ("On past experience, 24 hours to pick a shadow cabinet is ambitious," a Labour source quipped in reference to January's marathon reshuffle). 

Any hope that Corbyn would retreat without a fight has been dispelled. Tom Watson will meet him tomorrow morning to "discuss the way forward", a statement regarded as "ominous" by some of the leader's allies. Labour's deputy failed to back Corbyn's leadeership and warned of the need to be "ready to form a government" following an early election. But even if Watson calls on the leader to resign (which insiders say is far from guaranteed), few believe he will do so. 

Corbyn retains the support of his closest allies, John McDonnell, Diane Abbott and Jon Trickett, and has been backed by shadow defence secretary Emily Thornberry and Andy Burnham ("Those who put personal ambition before the party won't be forgiven or forgotten," a senior MP declared of the Manchester mayoral contender). He will look to repopulate the shadow cabinet with supporters from the 2015 intake, such as Clive Lewis, Richard Burgon, Cat Smith and Rebecca Long-Bailey. 

The Parliamentary Labour Party will meet on Monday at 6pm and discuss a motion of no confidence against Corbyn, tabled by veteran MPs Margaret Hodge and Ann Coffey. This will likely be followed by a secret ballot on Tuesday between 9am and 5pm. The rebels are confident of winning a majority (though dismiss reports that as many as 80 per cent will oppose Corbyn). But the Labour leader is still unlikely to resign at this juncture. Having entered office with the backing of just 15 MPs (now 14 following the death of Michael Meacher), he is untroubled by losing support that he never truly had. "He's an oddity. Very gentle but very robust," an ally told me. 

At this point, Corbyn's opponents would be forced to launch a direct leadership challenge, most likely in the form of a "stalking horse". John Spellar, a veteran of Labour's 1980s strife, Hodge and Barry Sheerman have been touted for the role. A matter of fierce dispute on Sunday was whether Corbyn would automatically make the ballot if challenged. Labour's lawyers have told the party that he would not, forcing him to win 50 MP/MEP nominations to stand again (a hurdle he would struggle to clear). But Corbyn's allies counter that their own legal advice suggests the reverse. "It could get very messy and end up in the courts," one senior rebel lamented.

Some take the view that natural justice demands Corbyn is included on the ballot, the view expressed by Tony Blair to MPs. In a new leadership contest, Watson and/or Angela Eagle are regarded as the likeliest challengers, though there is still no agreed alternative. Many argue that the party needs a "Michael Howard figure" to achieve party unity and limit the damge at an early election. He or she would then by succeeded by a younger figure (a "Cameron") such as Chuka Umunna, Dan Jarvis or Lisa Nandy.

But a Labour source told me of the potential contest: "Don't rule out Yvette. The only grown-up candidate and I believe she wants it". He emphasised the need to look beyond the task of "unifying the party" and towards the forthcoming Brexit negotiations. Cooper, an experienced economist, was best-qualified to lead at a moment of "national crisis", the source suggested. Watson, he added, wanted "the leadership handed to him on a plate" with backing from grandees across the party. John McTernan, Blair's former political director, said that he would be "very happy" to have the Brownite as leader. Despite Watson's leading role in the coup against Blair in 2006, many from Labour's right believe that he is best placed to defeat Corbyn and unite the party. Some point to Eagle's fourth-place finish in Labour's deputy leadership election as evidence of her limited appeal. 

McDonnell, Corbyn's closest ally, who MPs have long believed retains leadership ambitions, insisted on Sunday that he would "never stand". Most believe that the shadow chancellor, a more abrasive character than Corbyn, would struggle to achieve the requisite 37 MP/MEP nominations. 

The Labour leader's allies remain confident that he would win majority support from members if challenged. Rebels speak of an "unmistakable shift" in opinion since Brexit but concede that this may prove insufficient. They are prepared to mount repeated challenges to Corbyn if necessary in order to "wear him down". But an early general election, which Boris Johnson is expected to trigger if elected Conservative leader, could deny them the chance. 

As the PLP assembles in Committee Room 14 at 6pm, the activist group Momentum will assemble in Parliament Square for a #KeepCorbyn protest. It is a fitting symbol of a party fatally torn between its members and its MPs. Unless the two can somehow be aligned, Labour will remain united in name only. 

George Eaton is political editor of the New Statesman.