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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.

Rafael Behr is political columnist at the Guardian and former political editor of the New Statesman

This article first appeared in the 27 February 2012 issue of the New Statesman, The God Wars

Photo: Getty Images
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How can Britain become a nation of homeowners?

David Cameron must unlock the spirit of his postwar predecessors to get the housing market back on track. 

In the 1955 election, Anthony Eden described turning Britain into a “property-owning democracy” as his – and by extension, the Conservative Party’s – overarching mission.

60 years later, what’s changed? Then, as now, an Old Etonian sits in Downing Street. Then, as now, Labour are badly riven between left and right, with their last stay in government widely believed – by their activists at least – to have been a disappointment. Then as now, few commentators seriously believe the Tories will be out of power any time soon.

But as for a property-owning democracy? That’s going less well.

When Eden won in 1955, around a third of people owned their own homes. By the time the Conservative government gave way to Harold Wilson in 1964, 42 per cent of households were owner-occupiers.

That kicked off a long period – from the mid-50s right until the fall of the Berlin Wall – in which home ownership increased, before staying roughly flat at 70 per cent of the population from 1991 to 2001.

But over the course of the next decade, for the first time in over a hundred years, the proportion of owner-occupiers went to into reverse. Just 64 percent of households were owner-occupier in 2011. No-one seriously believes that number will have gone anywhere other than down by the time of the next census in 2021. Most troublingly, in London – which, for the most part, gives us a fairly accurate idea of what the demographics of Britain as a whole will be in 30 years’ time – more than half of households are now renters.

What’s gone wrong?

In short, property prices have shot out of reach of increasing numbers of people. The British housing market increasingly gets a failing grade at “Social Contract 101”: could someone, without a backstop of parental or family capital, entering the workforce today, working full-time, seriously hope to retire in 50 years in their own home with their mortgage paid off?

It’s useful to compare and contrast the policy levers of those two Old Etonians, Eden and Cameron. Cameron, so far, has favoured demand-side solutions: Help to Buy and the new Help to Buy ISA.

To take the second, newer of those two policy innovations first: the Help to Buy ISA. Does it work?

Well, if you are a pre-existing saver – you can’t use the Help to Buy ISA for another tax year. And you have to stop putting money into any existing ISAs. So anyone putting a little aside at the moment – not going to feel the benefit of a Help to Buy ISA.

And anyone solely reliant on a Help to Buy ISA – the most you can benefit from, if you are single, it is an extra three grand from the government. This is not going to shift any houses any time soon.

What it is is a bung for the only working-age demographic to have done well out of the Coalition: dual-earner couples with no children earning above average income.

What about Help to Buy itself? At the margins, Help to Buy is helping some people achieve completions – while driving up the big disincentive to home ownership in the shape of prices – and creating sub-prime style risks for the taxpayer in future.

Eden, in contrast, preferred supply-side policies: his government, like every peacetime government from Baldwin until Thatcher’s it was a housebuilding government.

Why are house prices so high? Because there aren’t enough of them. The sector is over-regulated, underprovided, there isn’t enough housing either for social lets or for buyers. And until today’s Conservatives rediscover the spirit of Eden, that is unlikely to change.

I was at a Conservative party fringe (I was on the far left, both in terms of seating and politics).This is what I said, minus the ums, the ahs, and the moment my screensaver kicked in.

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.