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25 June 2015

Why Osborne might well reduce the top tax rate to 40p

There are principled and pragmatic reasons for the Chancellor to act in his first Budget of the new parliament.

By George Eaton

Throughout the election campaign, the Tories refused to rule out again reducing the top rate of tax, from 45p to 40p. David Cameron and George Osborne would not have maintained this ambiguity unless they sincerely wanted to keep this option open. It is unsurprising, then, that ahead of his emergency Budget on 8 July, the Chancellor is contemplating just this move (as his shadow Chris Leslie recently warned he would). 

Osborne wanted to reduce the rate from 50p to 40p in his 2012 statement but was prevented from doing so by the Lib Dems (who demanded a mansion tax in return). With the Conservatives now alone in government for the first time in 18 years, this political obstacle has been removed. 

After the slump in the Tories’ popularity that followed the first rate cut, plenty will ask how Osborne could possibly be tempted to take the same path again. But there are both principled and pragmatic reasons for him to do so. The first and most salient is that the Chancellor does not believe in the 45p rate. He regards it as an economic hindrance that is outmoded in a globalised world (just four EU member states have a higher rate). Osborne is typically viewed as a political pragmatist par excellence. But his decision to cut the rate from 50p to 45p was an act of pure conviction – he was prepared to accept the firestorm that followed. 

Osborne wants to leave the Treasury (potentially for No.10) with the top rate returned to 40p. He will not have a better opportunity to act than his first Budget. “If it were done when ’tis done, then ’twere well it were done quickly.” The Tories are in their honeymoon period (when voters give them the benefit of the doubt) and Labour and the Lib Dems are leaderless. When the opposition protest, Osborne will be able to point out that he has merely returned the rate to its level for 155 of the 156 months that Labour was in power. The 2012 “omnishambles” did not stop the Conservatives winning a majority in May. Any damage from cutting the top rate now will likely have dissipated by 2020. 

The Tories may yet baulk at the prospect of cutting taxes for the top 1 per cent of earners while cutting tax credits for those at the bottom. Osborne would be wise to balance the move with tax rises on the wealthy elsewhere in the Budget. But do not be surprised if Osborne resolves that the opportunity is too good to waste. 

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