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25 September 2015

George Osborne’s tax credit cut will be his 10p tax rate

Gordon Brown's abolition of the 10p rate made for smart politics - but catastrophic policy. George Osborne's cuts to tax credits will go the same way, predicts Will Cooling. 

By will Cooling

Let me tell you a story: with thoughts of assuming the premiership on his mind, an all-conquering Chancellor concludes his latest budget with an audacious raid onto enemy territory that leaves the Leader of the Opposition dumbfounded. He then proceeds to dominate the summer whilst his opponents are plunged into ideological warfare.

It’s a tale that will be very familiar to those of us who have despaired as Osborne’s triumph has coincided with Labour’s long dark summer of the soul. But it’s also a paragraph that can just as easily describe the afterglow of Gordon Brown’s final budget.

When Tony Blair fretted earlier this year that the 2015 General Election would see “a traditional left-wing party take on a traditional right-wing party with the traditional result” nobody would have agreed more than Gordon Brown. After all, when confronted by a David Cameron and George Osborne that were determined to paint him as the “roadblock to reform” Brown alighted on cutting the basic rate of Income Tax as a measure that would prove he had never been an old-fashioned “tax and spend” Labour Chancellor.

The problem was how such a tax cut would be funded as Brown had already stretched his rules on government borrowing to breaking point by increasing investment in public services. For that reason, increasing the deficit was out of the question. The answer came with another piece of political cross-dressing; simplifying the income tax system. Brown realised that he could pay for his cut to the basic rate by abolishing the lower rate. It made for terrific parliamentary theatre, as nobody could quite believe that a Chancellor whose image had drifted ever leftwards due to his guerrilla warfare against the Prime Minister and the long increase in public spending had finally achieved Margret Thatcher’s long-held dream of just two income tax bands.

Given his front-row-seat to Brown’s attempted coup de grâce, one has to believe that Osborne had 2007 in mind when he delivered his post-election budget. Believing that naturally conservative voters had forsaken them due to their dependence on an enlarged welfare state, the Tories had long wanted to cut tax credits. The fear that that they would be criticised for attacking the working poor held them back until Osborne stumbled upon an old argument of the hard-left and a new one of their soft cousins; that negative income tax subsidises low wages and that the minimum wage is not a true ‘living wage’. Osborne realised that if he coupled his tax credits cuts with an increase in the minimum wage he would be able to claim that he was taking these leftist critiques to their logical conclusion.   

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Therefore, just as Brown was able to hide what was effectively a tax increase for lower-income earners by cutting the basic rate, Osborne would claim that his increase to the minimum wage mitigated his cuts to tax credits. However just as those who were able to construct a rudimentary MS Excel Spreadsheet were soon able to disprove Brown’s delusions there’s been a slow drumbeat of people saying that Osborne’s changes actually hurt the working poor. It’s enough to make you wonder whether their desperation for a budget surprise stopped them from consulting widely enough to properly stress-test their radical ideas.

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What saved both Brown and Osborne over the short-term and doomed them over the long-term is that British tax policy follows-through remarkably quickly after a short bout of constipation; technical changes always seem tediously abstract until the first post-change P40s hit workers’ doormat. In April 2008 the complaints of real-live-voters hurting from Brown’s tax change forced him to change that year’s Finance Act to unpick the consequences of the last one.

Increasingly those Tories who have pushed the idea that they are the ‘real-workers-party’ are worried that the cuts in tax credits will have similar impact on the working poor. And if one believes the Institute for Fiscal Studies they are right to be worried. That is because the new ‘National Living Wage’ is set too low for most cases, and regardless, is too blunt an instrument to support those families that only have only one family member working or an unusually large group of dependents.

Even though George Osborne has enjoyed a good press he’s still had to call upon energetic whipping to ensure enough troops were marshalled to push through the cuts to tax credits on Second Reading. That’s because the more astute backbenchers already fear he’s marching them in the wrong dimension. When Osborne’s theories are superseded by a torrent of hard-luck cases the Government will be forced to comprise lest they be condemned for hurting the very same “strivers” that the Tories are trying to wean away from Labour.

The only question is, whether they do it more elegantly than Gordon Brown and Alistair Darling.