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27 July 2011

Osborne’s tax cut dilemma

Cutting taxes could cause at least as many problems as it solves for the Chancellor.

By George Eaton

Ever eager to distinguish himself from the coalition, Boris Johnson has called for a programme of tax cuts to “stimulate growth”. The National Insurance rise, he says, should be reversed and the 50p rate should be scrapped to demonstrate that London is “open for business”. George Osborne, who has long hinted that he will abolish the top rate by 2013, must be tempted to take up Johnson’s call for a supply-side revolution. Even today’s Sun attacks him for refusing to accept that a “dash for growth is not incompatible with reducing the deficit.” (Although in a post-hacking age that may no longer be a surprise.)

But it’s worth noting that cutting taxes could cause at least as many problems as it solves for the Chancellor. The Lib Dems are willing to support the abolition of the 50p rate but only if it is replaced by a range of new property-based taxes – exactly the sort of measures likely to enrage the right-wing press. Worse, the spectacle of a Conservative Chancellor cutting taxes for the richest one per cent while VAT remains at 20 per cent would be political gold for Labour. It would destroy Osborne’s already dubious claim that “we’re all in this together.” Polls have consistently shown that the 50p rate is popular with voters. A recent Sunday Times/YouGov survey, for instance, found that 33 per cent think the top rate should be scrapped, compared to 49 per cent who think it should be made permanent. Significantly, 51 per cent would like to see the starting threshold brought down from £150,000 to £100,000, with 29 per cent opposed.

In addition, unless Osborne can demonstrate that his tax cuts would be self-financing he would either have to slow the pace of deficit reduction (something he has repeatedly ruled out) or make even larger spending cuts. The five-year departmental budgets, we have been repeatedly told, are set in stone (the average cut is 11 per cent; 19 per cent if we exclude the NHS and international development – the ring-fenced departments.), which leaves Osborne with the option of making further cuts to welfare spending, something hardly likely to appeal to the Lib Dems. The Chancellor’s room for manoeuvre, it is becoming increasingly clear, is shrinking by the day.

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