Not as progressive as he likes to make out. Photo: Getty Images
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How does Labour move on from tax and spend?

Voting against further increases to the personal allowance would expose George Osborne's rhetoric for what it is.

Last week saw publication of the Conservative Government’s first Finance Bill. It’s through the Finance Bill that the Tories will give legal form to the tax measures announced in their Summer Budget.

And they make an ignominious start. True, they never promised us a Rose Garden. But, I beg your pardon, the Conservative Manifesto did promise not to increase rates of income tax. And the very first clause of that very first Bill breaks that promise by busting the ‘Tax Lock’ to permit a 7.5 per cent increase in income tax paid on dividends.

Nor was this the only tax promise to fail to survive the nine weeks from General Election to Summer Budget. The Tories also pledged to “increase the annual tax charges paid by those with non-domiciled status, ensuring that they make a fair contribution to reducing the deficit.” But the Budget gave us no increase in the annual charges. Instead we have some fairly modest changes which will remove the benefit of the status from those unlikely to have been entitled to claim it in the first place.

But, “over-firm” though the Manifesto commitments may be revealed to be, and with a second reading today, the task before Labour is to work out before the Committee stages in September where it stands on the Finance Bill measures.  

I’ll offer some thoughts in the coming days.

And I’ll assume Labour wants to shrug off the clothing of tax and spend and ask, instead, how it might wear its new garb whilst enhancing Labour values?  To do so is to accept, for the time being at least, the Conservatives’ narrative around the ‘right’ size of the state. Revisiting that question can await another day.

The first measure Labour should oppose is the proposed rise in the personal allowance.

Cameron spoke last month on the need to end the merry-go-round of “people working on the minimum wage having that money taxed by the government and then the government giving them that money back – and more – in welfare.”

But raising the personal allowance is medicine that gets nowhere near where the trouble is. There are several reasons why this is so. But most important: however high you raise the personal allowance, employers still have to deduct tax on income – in the form of National Insurance contributions – and pay it over to government.

As things stand, someone on minimum wage could work 31 hours a week before she had to start paying income tax. But she could only work 23 hours before paying National Insurance contributions.

If you really want to end the “ridiculous merry-go-round” you don’t focus on income tax which kicks in at 32 hours but on National Insurance contributions which kick in at 24 hours.

It’s just the wrong solution.

Raising the personal allowance is terrible policy for other reasons too.

It’s regressive: the lowest earning 46 per cent of adults already earn too little to pay income tax. Raising the personal allowance does nothing to help them. Indeed, those who presently benefit most in cash terms are, as IFS has identified, the second richest decile in the income distribution.

With the lower half of the adult income distribution already outside income tax the scope for helping the poorest through the tax system is limited. Tax credits are the sharpest way to target help at those who need it most. If, for reasons of ideology, you’ve discarded them from your tool box you’re left with blunter instruments. But here are two.

Council tax is highly regressive. In 2013/14, even net of Council Tax Support, it represented a staggering 13.5 per cent of the earnings of the poorest 20 per cent of households and only 1.9 per cent of the richest (source ONS) (6.4 per cent/4.3 per cent/3.1 per cent for intermediate quintiles). The case for spending part of that £4bn a year cost of raising the personal allowance to £12,500 on reducing this unfairness makes itself.

Compelling, too, although better understood, is the argument, already made above, for raising the level at which workers become liable to pay National Insurance contributions. If you spend that £4bn on raising the point at which you start to pay 12 per cent National Insurance contributions you can benefit those in work who earn £8,060 and above, reaching much further down the income distribution curve. Then you really will start to get people off the roundabout.

Of course, whatever you propose, the reality is that the Tories will press ahead, regardless, with increasing the personal allowance. And it is far, far too early to begin to formulate manifesto policies for 2020. But even at this stage in the electoral cycle there is work to be done in exposing the reality of Osborne’s One Nation rhetoric: a suite of tax policies which do nothing for the poorest and distribute their fruits to those who need them least. 

Jolyon Maugham​ is a barrister who specialises in tax. He advised the Labour party on tax policy, and blogs regularly on taxation here.

Jolyon Maugham is a barrister who advised Ed Miliband on tax policy. He blogs at Waiting for Tax, and writes for the NS on tax and legal issues. 

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Why relations between Theresa May and Philip Hammond became tense so quickly

The political imperative of controlling immigration is clashing with the economic imperative of maintaining growth. 

There is no relationship in government more important than that between the prime minister and the chancellor. When Theresa May entered No.10, she chose Philip Hammond, a dependable technocrat and long-standing ally who she had known since Oxford University. 

But relations between the pair have proved far tenser than anticipated. On Wednesday, Hammond suggested that students could be excluded from the net migration target. "We are having conversations within government about the most appropriate way to record and address net migration," he told the Treasury select committee. The Chancellor, in common with many others, has long regarded the inclusion of students as an obstacle to growth. 

The following day Hammond was publicly rebuked by No.10. "Our position on who is included in the figures has not changed, and we are categorically not reviewing whether or not students are included," a spokesman said (as I reported in advance, May believes that the public would see this move as "a fix"). 

This is not the only clash in May's first 100 days. Hammond was aggrieved by the Prime Minister's criticisms of loose monetary policy (which forced No.10 to state that it "respects the independence of the Bank of England") and is resisting tougher controls on foreign takeovers. The Chancellor has also struck a more sceptical tone on the UK's economic prospects. "It is clear to me that the British people did not vote on June 23 to become poorer," he declared in his conference speech, a signal that national prosperity must come before control of immigration. 

May and Hammond's relationship was never going to match the remarkable bond between David Cameron and George Osborne. But should relations worsen it risks becoming closer to that beween Gordon Brown and Alistair Darling. Like Hammond, Darling entered the Treasury as a calm technocrat and an ally of the PM. But the extraordinary circumstances of the financial crisis transformed him into a far more assertive figure.

In times of turmoil, there is an inevitable clash between political and economic priorities. As prime minister, Brown resisted talk of cuts for fear of the electoral consequences. But as chancellor, Darling was more concerned with the bottom line (backing a rise in VAT). By analogy, May is focused on the political imperative of controlling immigration, while Hammond is focused on the economic imperative of maintaining growth. If their relationship is to endure far tougher times they will soon need to find a middle way. 

George Eaton is political editor of the New Statesman.