All the things I could do if I had a little money. (Image: Flickr/fsecart)
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Raising the personal allowance: more expensive than you'd think, and not as progressive as they say

One of the announcements from yesterday’s budget was the Chancellor setting the path of income tax bands from 2015/16 to 2017/18. The personal tax allowance, the amount of income that can be earned before paying the 20p basic rate of income tax, will rise to £11,000, and the higher rate threshold, that amount earned before paying the 40p higher rate, will rise to £43,300. 

This sounds significant, but is a substantially less generous policy than the one mooted earlier in the week, of an £11,000 personal allowance this year, not in 2017/18. Because tax bands are up-rated by inflation anyway, delaying the £11,000 by two years substantially reduces the benefit to taxpayers. In the absence of any policy intervention, the personal tax allowance would be expected to rise to around £10,760 in 2017-18. This means the announced measure is a rise of just £240, and a benefit of £48 in reduced tax for basic rate taxpayers, rather than the £80 they would receive had it been implemented this year. The rise in the higher rate threshold is £400 higher than where it would fall if increased in line with inflation.

One suspects the chancellor turned away from the idea of an £11,000 personal allowance sooner because the OBR have substantially revised down their expectations of inflation. This increases the cost of an £11,000 personal allowance, since the gap between where it would fall under inflation-uprating and £11,000 is larger. Nonetheless, putting up tax bands faster than inflation is not cheap. The modest increases proposed in yesterdays budget will, by the Treasury’s own reckoning, cost close to £1.5bn.

Also important is that the OBR’s downward revision of inflation makes both the Liberal Democrats and Conservatives tax ambitions, of a £12,500 personal allowance by 2020/21 and, in the Conservatives case, a £50,000 higher rate threshold, much more expensive. At the time of the Conservative party conference last Autumn, this package of tax cuts was costed at around £7.2bn. Factoring in the impact of lower inflation, this has risen closer to £9bn. With the Coalition setting out a fairly gentle path of rises out to 2017/18 yesterday, the assumption has to be that the remaining £6.5bn of tax cuts will be back-loaded in the remaining years of the parliament.

The Coalition have justified their expensive tax cut strategy by highlighting how many workers have been lifted out of tax in this parliament. But, as has been consistently pointed out, those on middle to high incomes benefit the most from personal allowance increases. And those on the lowest earnings do not benefit at all, as they aren’t earning enough to pay tax anyway. Our distributional analysis of yesterday’s announcements (see below) illustrates this regressive pattern.

As the personal tax allowance has continued to rise above inflation, this latter group is growing in size. Using generous and expensive tax band up-rating as a strategy to support those on low incomes hasn’t just run out of road, it was flawed from the outset. Many commentators have pointed out that a rise in the threshold at which employees start paying NICs would be a better use of similar funds. Even better would be using this money to make Universal Credit and other in-work benefits more generous, since that would be much more tightly targeted at those on low incomes, and have little to no benefit for those higher up the income distribution.

 

Spencer Thompson is economic analyst at IPPR

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I believe only Yvette Cooper has the breadth of support to beat Jeremy Corbyn

All the recent polling suggests Andy Burnham is losing more votes than anyone else to Jeremy Corbyn, says Diana Johnson MP.

Tom Blenkinsop MP on the New Statesman website today says he is giving his second preference to Andy Burnham as he thinks that Andy has the best chance of beating Jeremy.

This is on the basis that if Yvette goes out first all her second preferences will swing behind Andy, whereas if Andy goes out first then his second preferences, due to the broad alliance he has created behind his campaign, will all or largely switch to the other male candidate, Jeremy.

Let's take a deep breath and try and think through what will be the effect of preferential voting in the Labour leadership.

First of all, it is very difficult to know how second preferences will switch. From my telephone canvassing there is some rather interesting voting going on, but I don't accept that Tom’s analysis is correct. I have certainly picked up growing support for Yvette in recent weeks.

In fact you can argue the reverse of Tom’s analysis is true – Andy has moved further away from the centre and, as a result, his pitch to those like Tom who are supporting Liz first is now narrower. As a result, Yvette is more likely to pick up those second preferences.

Stats from the Yvette For Labour team show Yvette picking up the majority of second preferences from all candidates – from the Progress wing supporting Liz to the softer left fans of Jeremy – and Andy's supporters too. Their figures show many undecideds opting for Yvette as their first preference, as well as others choosing to switch their first preference to Yvette from one of the other candidates. It's for this reason I still believe only Yvette has the breadth of support to beat Jeremy and then to go on to win in 2020.

It's interesting that Andy has not been willing to make it clear that second preferences should go to Yvette or Liz. Yvette has been very clear that she would encourage second preferences to be for Andy or Liz.

Having watched Andy on Sky's Murnaghan show this morning, he categorically states that Labour will not get beyond first base with the electorate at a general election if we are not economically credible and that fundamentally Jeremy's economic plans do not add up. So, I am unsure why Andy is so unwilling to be clear on second preferences.

All the recent polling suggests Andy is losing more votes than anyone else to Jeremy. He trails fourth in London – where a huge proportion of our electorate is based.

So I would urge Tom to reflect more widely on who is best placed to provide the strongest opposition to the Tories, appeal to the widest group of voters and reach out to the communities we need to win back. I believe that this has to be Yvette.

The Newsnight focus group a few days ago showed that Yvette is best placed to win back those former Labour voters we will need in 2020.

Labour will pay a massive price if we ignore this.

Diana Johnson is the Labour MP for Hull North.