The next Conservative leadership contest has begun. Not every move that the contenders make should be viewed through this prism. But it is an inescapable reality that one of them will succeed David Cameron before the end of this parliament.
In the first all-Conservative Budget since November 1996, George Osborne has an opportunity to raise his stock among his party by reducing the top rate of tax from 45p to 40p (as 160 Tory MPs have demanded). The absence of the Liberal Democrats from the government frontbench means that Osborne, one Conservative tells me, has “no excuse not to act”. But in his interview with Andrew Marr yesterday, the Chancellor signalled that he does not intend to use his political freedom to cut the top rate on Wednesday. He emphasised that his “priority” was to deliver to “the promises upon which we were elected” (of which a cut in the top rate was not one): a £12,500 personal allowance and a £50,000 40p tax threshold. Osborne appears to have wisely concluded that it would be dangerously incongruous to also reduce taxes for the top 1.5 per cent of earners while austerity (such as tax credit cuts) continues elsewhere.
The Chancellor was also notably lukewarm towards the argument that more companies should pay the living wage to compensate those whose in-work benefits will be reduced (as former No. 10 adviser Steve Hilton has recently proposed). He said that “the best answer” to this conundrum was to cut taxes and “to make sure your businesses are growing and profitable and that they can pay good salaries”. At no point did he endorse the argument made by the left and, increasingly, the right that cheapskate corporations are denying their workers the pay they deserve.
In private meetings, I’m told, Osborne has consistently dismissed those (such as Jo Johnson, the universities minister and the author of the Conservative manifesto) who suggested that the Tories should annex Labour’s policy of providing tax breaks to companies who raise salaries to living wage level. To him, this is statist meddling based on the false premise that firms who can afford to pay more aren’t. As the Resolution Foundation’s Gavin Kelly writes in an essential blog: “Perhaps the biggest misconception is the voguish notion that if tax credits are cut, employers will somehow decide to offer pay rises to fill the gap. This is saloon-bar economics espoused by some on both left and right. The available evidence suggests that the great majority of the gains from tax credits flow through to employees, not employers.”
It is significant, then, that Osborne’s most formidable rival for the Conservative leadership, Boris Johnson, has used his pre-Budget Telegraph column to advocate the changes the Chancellor has refused to offer (for now): a cut in the top rate of tax and the expansion of the living wage. The latter is proposed as political cover for the former: “We think of ourselves according to our relationship with others – and it is simply not fair that a Budget should put more disposable income in the pockets of the rich and less disposable income in the pockets of the poor. And that, alas, would be the result if we were to cut top-rate tax and simultaneously to cut in-work benefits without any compensating improvements in pay.” Unlike Osborne, the Mayor of London contends that firms are using tax credits to artificially supress wages: “As for low pay, it isn’t a function of market forces. It’s being propped up by the taxpayer. That needs to end. And that means business has got to start paying its people a wage they can live on.”
It is an appealing pitch that offers something to both the right (a cut in the top rate) and the left (the living wage) of the Conservative Party. The Mayor has cast himself as a “one nation” figure more capable of performing the political gymnastics required to deliver free market policies. Unless Osborne surprises on Wednesday, Johnson’s alternative Budget will retain political potency.