Clegg’s tax message to Osborne: we’re not in this one together

The Lib Dem leader has set the terms of pre-Budget debate and put the Tories on the defensive.

There is a Russian joke from the Soviet era: a genie offers to grant a poor peasant his heart's desire. "My neighbour has this beautiful cow that produces bucketfuls of milk," says the lowly farmer. "He sold the milk and bought a bull. Now he has a whole herd of cows . . ." "I get it!" the genie interrupts, "your wish is to have a cow like your neighbour's." "No," the baffled peasant replies. "I want you to kill my neighbour's cow."

When the system is rigged so that the little guy can't imagine making a fortune for himself, he thinks it only fair that the already fortunate should be brought down a peg or two. British capitalism doesn't yet suffocate ambition quite like Soviet communism but it lacks convincing offers of self-advancement. The surest way to get rich in this country is to have rich parents; the likeliest outcome for poor children is poor adulthood. Those in the middle, made insecure by rising unemployment and frozen wages, feel dragged down by economic currents and doubt their individual efforts can beat the tide.

Addressing that fear of financial drowning is the biggest political challenge facing the Chancellor ahead of his 2012 Budget. The economic challenge is to stimulate growth. The two imperatives are related but not as easily aligned as George Osborne would like. The natural way to bring them together is to reinforce the pockets of the less well-off with tax cuts.

Wealth stealth

The problem is that Osborne has made extreme parsimony the emblem of his credibility in the eyes of voters and financial markets. Any tax cut has to be balanced with an equivalent spending cut or a tax rise. To help the "squeezed middle", Osborne has to make someone else pay.

Who? The obvious candidates are people with plenty of money already, but that is a tricky proposition for a Tory chancellor. Conservatives abhor using rich people's cash to compensate others. It is a practice believed to denigrate aspiration and stunt the economy by punishing enterprise. This ethos – the need to privilege "wealth creators" in the tax system – is ingrained in the party's culture (and policed by its rich donors). It was adopted by New Labour on the understanding that Britons were mostly unoffended by other people's wealth and hostile to the idea of it being confiscated for collective ends. (In reality, Gordon Brown redistributed energetically but felt obliged to so so mostly by stealth.)

A vital question in politics today is how much that attitude is changing. The financial-sector bailout felt like a redistribution from the ordinary to the opulent. The City authors of the economic crisis were spared the pain of austerity. Plainly, bankers are ripe for a bashing. It is less clear whether that translates into an appetite for wider-reaching raids on the well-off.

Nick Clegg is gambling that it does. He is staking his party's future on a policy of easing the tax burden for people on low pay and making up the difference from those higher up the scale. In practice, this involves vigorous, high-profile lobbying of the Chancellor to accelerate raising personal income-tax allowances towards £10,000. This is already coalition policy, but only as an aspiration to be met some time this parliament. Clegg is openly challenging Osborne to get a move on.

This is not quite an ambush. The Lib Dems warned their coalition partners what they were about to do, but did not seek their approval. "It was squared with Downing Street, but not exactly agreed," says one senior government official. The Tories grumble that the Lib Dem campaign is a travesty of Budget tradition. Coalition changes the rules, reply the Lib Dems. There is no tradition of two-party government.

On the question of where the extra money would come from, the Lib Dems have floated trimming pension relief for higher-rate taxpayers. Clegg also clings to the idea of a "mansion tax" on houses worth more than £2m.

That policy is toxic for Tories, whose safe seats are dotted with fancy real estate. The prospect of sizing up the nation's housing stock for a new tax threatens also to make ordinary households look wealthier than they feel. Labour, by contrast, is open to the idea. The mansion tax is being actively debated in Ed Miliband's office, partly because the leader's freshly advertised enthusiasm for fiscal discipline needs reinforcing with revenue-raising measures and partly because, with parliament on course to stay hung at the next election, there are strategic reasons to flirt with Lib Dem policy.

Privately, senior figures around Miliband admit to being impressed at how effectively Nick Clegg has set the terms of pre-Budget debate and put the Tories on the defensive. Although Labour harbours no affection for the Lib Dems, there is recognition of a shared interest in branding the Conservatives as defenders of inherited privilege and hoarded wealth.

Genie released

Meanwhile, Clegg's manoeuvres have aroused the competitive tax-cutting spirit on the Tory benches. In recent weeks, Osborne has fielded calls from his own side for corporation tax cuts, tax breaks for married couples, scrapping the 50p top rate and reducing employers' National Insurance contributions. That last suggestion overlaps with one prong of Labour's five-point growth plan – a National Insurance break for small businesses. Ed Balls, the shadow chancellor, would also cut VAT and has warily acknowledged that, given the need for economic stimulus, Clegg's plans to raise the income-tax threshold are better than nothing.

A Conservative chancellor should thrive in a climate where the consensus is settling around the need to trim taxes. But Osborne is constrained by the obligation to match any relief with immediate and equal pain elsewhere. That dilemma will follow him right up to the next election. Politics in the age of austerity will be framed increasingly in terms of who pays, or, rather, whose pain. The Chancellor once said it could be everybody's all at the same time, in it together. It was never a persuasive line. Now even the Lib Dems aren't toeing it. They are campaigning for faster redistribution.

Nick Clegg is looking at Tory cattle with a murderous glint in his eye and a powerful political genie is released from the bottle.