Danny Alexander is mistaken in claiming that raising the personal allowance will reward people on "low and middle incomes". Photo: Getty
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Why raising the personal allowance won't help people on low incomes

As a strategy for tackling low pay, raising the personal allowance ran out of usefulness several years ago.

The Liberal Democrats have made two closely linked announcements. Firstly, they pledged to raise the threshold at which individuals start to pay National Insurance (NI) on their earnings, which currently stands at £7,956. This is to move it more in line with the personal allowance (PA), which is currently at £10,000 and scheduled to increase by £500 at the start of the next tax year.

The problem with the Lib Dems proposal is the other part of their plan; they will only act on the NI threshold when further increases in the PA have taken place, moving it to £12,500 over the next parliament. This, it is claimed, would save basic rate taxpayers £400, and, in the words of Danny Alexander, would be a tax cut "that rewards people particularly working on low and middle incomes".

There are three major problems with this second announcement.

Let’s assume they plan to raise the PA by £500 a year, starting in 2016/17 from a base of £10,500, so that it reaches its goal in the 2019/20 tax year. Yet the PA rises by RPI each year anyway, and to my knowledge none of the major parties are planning a nominal freeze in its value. This means we should be comparing it not to a personal allowance of £10,500, but to one of around £11,370. This reduces the amount that basic rate taxpayers would save to around £227, not the £400 claimed.

Secondly, raising the personal allowance tends to benefit families on higher incomes the most, those on middle incomes less so, and those on the lowest incomes hardly at all. This is because those on the highest incomes are the most likely to have two taxpayers, and those at the bottom of the income distribution are either not in work or not earning enough to pay tax. Any increase in the personal allowance from its current level does not help them at all. The chart below illustrates the distribution of gains from a PA increase of £500, estimated at the time of the budget. We would expect a similar pattern to hold from a rise to £12,500. One method that has been used to limit the gains to those on the highest incomes has been to reduce or fix the threshold at which workers pay tax at 40 per cent, but this itself has been controversial, with the OBR’s estimate that one in three may end up paying the 40p tax rate by 2033 causing concern.

(Click on the graph to enlarge).

Finally, It is easy to see the attraction of wanting to take people out of tax. But we need to bear in mind that raising the personal allowance is very expensive. We estimated at the time of the budget that an increase in the PA of £500 would cost around £2.5bn. Clearly, raising it even further will keep adding to the bill. Do we really think giving more money to those on the highest incomes is the best use of scarce fiscal resources?

The plans by the Lib Dems to also increase the threshold at which workers pay National Insurance (NI), currently well below the PA, are far more sensible since they will help workers on lower incomes. But again they run into the question of cost. If the plan is to increase both the PA and the NI threshold to £12,500, we are likely talking about tens of billions of pounds of lost revenue. Therefore we really need to see detailed plans of how to pay for these giveaways before considering whether they should be adopted.

As a strategy for tackling low pay, raising the personal allowance ran out of usefulness several years ago. While it is probably right to start looking at the National Insurance threshold instead, if we really want to tackle the root causes of poverty, income inequality and low living standards, we need some new ideas.

Spencer Thompson is senior economic analyst at the Institute for Public Policy Research (IPPR)

Spencer Thompson is economic analyst at IPPR

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Labour's establishment suspects a Momentum conspiracy - they're right

Bernie Sanders-style organisers are determined to rewire the party's machine.  

If you wanted to understand the basic dynamics of this year’s Labour leadership contest, Brighton and Hove District Labour Party is a good microcosm. On Saturday 9 July, a day before Angela Eagle was to announce her leadership bid, hundreds of members flooded into its AGM. Despite the room having a capacity of over 250, the meeting had to be held in three batches, with members forming an orderly queue. The result of the massive turnout was clear in political terms – pro-Corbyn candidates won every position on the local executive committee. 

Many in the room hailed the turnout and the result. But others claimed that some in the crowd had engaged in abuse and harassment.The national party decided that, rather than first investigate individuals, it would suspend Brighton and Hove. Add this to the national ban on local meetings and events during the leadership election, and it is easy to see why Labour seems to have an uneasy relationship with mass politics. To put it a less neutral way, the party machine is in a state of open warfare against Corbyn and his supporters.

Brighton and Hove illustrates how local activists have continued to organise – in an even more innovative and effective way than before. On Thursday 21 July, the week following the CLP’s suspension, the local Momentum group organised a mass meeting. More than 200 people showed up, with the mood defiant and pumped up.  Rather than listen to speeches, the room then became a road test for a new "campaign meetup", a more modestly titled version of the "barnstorms" used by the Bernie Sanders campaign. Activists broke up into small groups to discuss the strategy of the campaign and then even smaller groups to organise action on a very local level. By the end of the night, 20 phonebanking sessions had been planned at a branch level over the following week. 

In the past, organising inside the Labour Party was seen as a slightly cloak and dagger affair. When the Labour Party bureaucracy expelled leftwing activists in past decades, many on went further underground, organising in semi-secrecy. Now, Momentum is doing the exact opposite. 

The emphasis of the Corbyn campaign is on making its strategy, volunteer hubs and events listings as open and accessible as possible. Interactive maps will allow local activists to advertise hundreds of events, and then contact people in their area. When they gather to phonebank in they will be using a custom-built web app which will enable tens of thousands of callers to ring hundreds of thousands of numbers, from wherever they are.

As Momentum has learned to its cost, there is a trade-off between a campaign’s openness and its ability to stage manage events. But in the new politics of the Labour party, in which both the numbers of interested people and the capacity to connect with them directly are increasing exponentially, there is simply no contest. In order to win the next general election, Labour will have to master these tactics on a much bigger scale. The leadership election is the road test. 

Even many moderates seem to accept that the days of simply triangulating towards the centre and getting cozy with the Murdoch press are over. Labour needs to reach people and communities directly with an ambitious digital strategy and an army of self-organising activists. It is this kind of mass politics that delivered a "no" vote in Greece’s referendum on the terms of the Eurozone bailout last summer – defying pretty much the whole of the media, business and political establishment. 

The problem for Corbyn's challenger, Owen Smith, is that many of his backers have an open problem with this type of mass politics. Rather than investigate allegations of abuse, they have supported the suspension of CLPs. Rather than seeing the heightened emotions that come with mass mobilisations as side-effects which needs to be controlled, they have sought to joins unconnected acts of harassment, in order to smear Jeremy Corbyn. The MP Ben Bradshaw has even seemed to accuse Momentum of organising a conspiracy to physically attack Labour MPs.

The real conspiracy is much bigger than that. Hundreds of thousands of people are arriving, enthusiastic and determined, into the Labour party. These people, and their ability to convince the communities of which they are a part, threaten Britain’s political equilibrium, both the Conservatives and the Labour establishment. When the greatest hope for Labour becomes your greatest nightmare, you have good call to feel alarmed.