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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Chuka Umunna calls for "solidarity" among Labour MPs, whoever is voted leader

The full text of shadow business secretary Chuka Umunna's speech to Policy Network on election-winning ideas for Labour's future, and the weaknesses of the New Labour project.

There has never been an easy time to be a social democrat (or “democratic socialist” as we sometimes call ourselves in Britain). Whereas the right can demonise the poor and extol the virtues of the market, and the hard left can demonise the market and extol the role of the state, our position of constraining the domination of markets and reforming the state is, by definition, more complex.

It is nonetheless the case that social democracy has a historic responsibility, in every generation, to renew democracy and preserve a civic culture. This is achieved not through soundbites and slogans, but through the hard-headed development of a progressive politics that reconciles liberty and democracy, new comers and locals to our communities, business and workers, in a common life that preserves security, prosperity and peace.  This historic mission is all the more urgent now and my determination that we succeed has grown not weakened since our election defeat last May.

But, in order to be heard, it is necessary to make balanced and reasonable argument that both animates and inspires our movement, and which is popular and plausible with the people.  The first is pre-requisite to the second; and there is no choice to be made between your party’s fundamental principles and electability. They are mutually dependent - you cannot do one without the other.

We are in the midst of choosing a new leader and it is clear to anyone who has watched the UK Labour Party leadership election this summer that amongst a significant number there is a profound rage against Third Way politics – as pursued by the likes of Bill Clinton, Tony Blair, Gerhard Schröder and others - as a rejection of our fundamental values.

In the UK there is a view that New Labour accepted an uncritical accommodation with global capital that widened inequality, weakened organised labour and we were too close to the US Republicans and too far from the European left.

I do not believe this is fair, not least because we rescued many of our public services from the scrap heap when we came to office in 1997 and there were very significant achievements  we should celebrate.  New Labour renewed our National Health Service in a fundamental way; we built new schools and improved existing ones; we set up new children’s centres all over the country; we brought in a National Minimum Wage; we worked with others to bring peace to Northern Ireland; we introduced civil partnerships.  Just some of our achievements.

However, though we may take issue with the critique, I do not think we can simply dismiss out of hand those who hold critical views of New Labour. Like any government, the New Labour administration made mistakes - it could and should have achieved more, and done more to challenge the Right’s assumptions about the world. In the end, it is not unreasonable to be ambitious for what your party in government can achieve in building greater equality, liberty, democracy and sustainability. It is far better we acknowledge, not reject, this ambition for a better world, as we seek to forge a new politics of the common good fit for the future.

Realising our values in office has been disrupted by globalisation and the surge of technological forces that are displacing and reshaping industry after industry.

Some argue that globalisation as an ideological construct of the right. But we must recognise that we live in an increasingly integrated world in which markets have led to an unprecedented participation of excluded people in prosperity, a rise in living standards for hundreds of millions  of people and a literacy unprecedented in human history – this is particularly so in emerging economies like my father’s native Nigeria. And the internet has led to a level of accountability that has disturbed elites.

Yet, this has been combined with a concentration of ownership that needs to be challenged, of a subordination of politics that requires creative rather than reactive thinking, and these global forces have exacerbated inequalities as well as helped reduce poverty.

So it is important that we understand the sheer scale and impact of new technologies. At the moment we are engaged in a debate about Uber and its threat to one of the last vestiges of vocational labour markets left in London, those of the black taxi cabs and their attainment of 'The Knowledge'. But the reality is that within the next decade there will be the emergence of driverless cars so we have to intensify our exploration of how to support people in a knowledge economy and the realities of lifelong learning, as well as lifelong teaching. As people live longer we will have to think about how to engage them constructively in work and teaching in new ways.

Once again, I'm addressing all of this, Social Democracy requires a balanced view that domesticates the destructive energy of capital while recognising its creative energy, that recognises the need for new skills rather than simply the protection of old ones. A Social Democracy that recognises that internationalism requires co-operation between states and not a zero sum game that protectionism would encourage.

Above all, Social Democratic politics must recognise the importance of place, of the resources to be found in the local through which the pressures of globalisation can be mediated and shaped. Our job is to shape the future and neither to accept it as a passive fate nor to indulge the fantasy that we can dominate it but to work with the grain of change in order to renew our tradition, recognising the creativity of the workforce, the benefits of democracy and the importance of building a common life.  Sources of value are to be found in local traditions and institutions.

This also requires a recognition that though demonstration and protest are important,; but relationships and conversations are a far more effective way of building a movement for political change.

One of the huge weaknesses of New Labour was in its reliance on mobilisation from the centre rather than organising. It therefore allowed itself to be characterised as an elite project with wide popular support but it did not build a base for its support within the party across the country, and it did not develop leaders from the communities it represented. It was strong on policy but weak on strengthening democratic politics, particularly Labour politics.

Over half a million people are now members, supporters or affiliated supporters of our party, with hundreds of thousands joining in the last few weeks. Some have joined in order to thwart the pursuit of Labour values but many more have joined to further the pursuit of those values, including lots of young people. At a time when so many are walking away from centre left parties across the Western world and many young people do not vote let alone join a party, this is surely something to celebrate.

So it is vital that we now embrace our new joiners and harness the energy they can bring to renewing Labour’s connection with the people. First, we must help as many them as possible to become doorstep activists for our politics. Second, I have long argued UK Labour should campaign and organise not only to win elections but to affect tangible change through local community campaigns. We brought Arnie Graf, the Chicago community organiser who mentored President Obama in his early years, over from the U.S. to help teach us how to community organise more effectively. We should bring Arnie back over to finish the job and help empower our new joiners to be the change they want to see in every community – we need to build on the links they have with local groups and organisations.

I mentioned at the beginning that in every generation Social Democracy is besieged from left and right but the achievements of each generation are defined by the strength of a complex political tradition that strengthens solidarity through protecting democracy and liberty, a role for the state and the market and seeks to shape the future through an inclusive politics. Solidarity is key which is why we must accept the result of our contest when it comes and support our new leader in developing an agenda that can return Labour to office.

Yes, these are troubled times for social democrats. All over Europe there is a sense among our traditional voters that we are remote and do not share their concerns or represent their interests or values.  There is surge of support for populist right wing parties from Denmark to France, of more left wing parties in Greece and Spain and in Britain too. There is renewal of imperial politics in Russia, the murderous and abhorrent regime of ISIL in the Middle East, volatility in the Chinese economy and in Europe a flow of immigration that causes fear and anxiety.

But, the task of Social Democracy in our time is to fashion a politics of hope that can bring together divided populations around justice, peace and prosperity so that we can govern ourselves democratically. We have seen worse than this and weathered the storm. I am looking forward, with great optimism to be being part of a generation that renews our relevance and popularity in the years to come.

Chuka Umunna is the shadow business secretary and the Labour MP for Streatham.