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Osborne took a risk on the 50p tax to escape the quad-wrangle

Why did the Chancellor take his great tax gamble? Because it shows who's really in charge.

George Osborne is admired in the Treasury for his capacity to delegate. Civil servants like to be left alone and memories are fresh of the black days of Gordon Brown's maniacal control.

By contrast, the current Chancellor is happy to let the bean-counters do their thing while he trots over to Downing Street for daily war games, plotting ways to secure a Tory majority at the next election.

There is no laziness involved. Osborne works hard, it's just that he has two jobs: running the economy and devising Conservative party strategy. They often look like the same thing but tensions arise. If he were preoccupied exclusively with opinion polls, he would not have cut the top rate of income tax from 50p to 45p. This was the policy beacon that shone through the blizzard of measures announced in the Budget on 21 March.

Even as coalition ministers insist that the rich are being made to pay in other ways, a tax break for people earning over £150,000 a year is emblematic. It is hugely unpopular and seems tailor-made to reinforce public suspicion that Tories cannot resist cosseting tycoons. It was the hope of flushing out that toxic impulse that led Brown to create the 50p rate in the first place. Until now, Osborne has refused to oblige. Why does he now let himself be flushed?

The Chancellor's image in Westminster as a fanatical Machiavellian invites elaborate explanations involving bluffs and traps. The reputation is partly justified. Those who work with Osborne in the Treasury report a formidable capacity to fillet a heap of data for political messages. He never has to be briefed twice.

Instant gratification

At the same time, Whitehall is not persuaded that there is much of a long-term strategy. "He is a shrewd tactician," says one Treasury veteran, who has observed up close how the Chancellor works. "He doesn't think more than a few steps ahead. He doesn't feel he needs to because he's so confident that when the time comes he'll think of something." Osborne is a chancer.

Despite the risks, there is instant political gratification to be had from cutting the top rate of tax. It reinforces the Chancellor's credentials as a torch-bearer for authentic Toryism when the Prime Minister is seen as ideologically contaminated by coalition. As one government adviser puts it: "At a stroke, you buy yourself a lot of room with the right of the party, with donors and with the press."

But Osborne has only taken that opportunity because he judges that Labour is weak. The budget gives Ed Miliband ammunition to accuse the government of crimes against solidarity but it also challenges the opposition to declare what it would do differently and, in particular, whether it would restore the 50p rate. (Ed Balls has said he cannot yet be sure.)

Besides, Labour has been attacking Osborne for itching to make the move anyway and the Liberal Democrats have said they would never permit it unless some other device were found to inflict austerity on the wealthy. The Chancellor was thus being portrayed as a frustrated friend of the rich instead of a powerful one; which is worse?

There is, meanwhile, a conviction among top Tories that Miliband's instincts are further to the left than his public pronouncements and that he is struggling to prevent his party from drifting into unelectable reveries of mass redistribution. Osborne is confident that, even if his move is unpopular, Labour's glee will be so immoderate as to put off anyone who takes a more nuanced view of optimal tax rates.

That leads to the main reason Osborne has taken such a gamble (and no one in government denies the move is risky): enough business leaders told him it would work as an economic tonic. Corporate and financial bigwigs have been queuing up to denounce the 50p rate for signalling hostility to enterprise, chasing ambitious types overseas and inciting tax evasion. Scrapping it would, they said, bring forth the elusive surge of investment that the Chancellor craves. Conveniently, HMRC has also calculated that the 50p rate was raising much less than had previously been promised. As one Whitehall observer puts it: "Too many people that the government listens to on growth were saying, 'This is a problem.'"

Osborne, like so many of his political peers, has no first-hand experience of running a company or making money from scratch and is impressed by people who have done both. (They can be doubly persuasive when viewed as potential contributors to party funds.) The Chancellor is hypersensitive to the demands of business, even by the standards of previous Exchequer chieftains. Treasury officials find demands to deal with obscure European directives or footling regulations landing on the top of their in-trays within moments of Osborne receiving a grumbling industry delegation.

No mansion tax

So the Chancellor was easily convinced that cutting the 50p rate would send a pro-enterprise flare up over the UK. He had originally wanted to slash the rate down to 40p but was quickly dissuaded from this course in the "quad" - the coalition steering committee where Osborne sits alongside Cameron, Nick Clegg and Danny Alexander.

The Lib Dems insisted that such a flagrant favour to the well-off should be balanced with a raid on expensive property - a so-called "mansion tax". But Cameron vetoed any permanent new levy on homes. Thus was the broad outline of the budget compromise struck: the Tories got a 45p income tax rate, the Lib Dems got acceleration of the plan to raise the personal allowance, plus noisy pledges to clamp down on wealthy tax dodgers and a stamp-duty hike to show that luxury houses hadn't been forgotten altogether.

This pre-Budget quad-wrangle represents a new feature of British politics and one that erodes a chancellor's power. Brown never felt the need to debate his plans with anyone, not even the Prime Minister. He certainly never had to satisfy politically needy Lib Dems. It would be only human for the Chancellor to want to kick back at that constraint, to do something counter-intuitive and audacious. Why did Osborne take his great tax gamble? Because he can; because it shows who's really in charge.

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

This article first appeared in the 26 March 2012 issue of the New Statesman, Mission impossible

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.