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1 December 2016

Why is John McDonnell promising so much for the affluent and the old?

The shadow chancellor's promises make electoral sense, but mean a lot of pain for the young and the poor. 

By Stephen Bush

If Labour wants to get back into power any decade soon, it’s going to have to take a bite out of the grey vote. The Conservatives’ electoral hegemony has two poles: dual-earner couples earning above average incomes, and the over-65s.

Despite all the talk about how Theresa May planned to focus on the “just about managing”, it was David Cameron’s coalition that were the big winners from the Autumn Statement last month, or at least half of it. For dual-earner couples, there was another increase in the income tax threshold, and the promise of more to come, as well as a hike in in the point when the 40 per cent rate takes effect, from 40p on every pound earned above £42,000 to 40p on every pound earned above £45,000.

But there may be trouble ahead for the other pillar of the Conservative coalition: the old. In 2010, the coalition introduced the triple lock – where the state pension is increased every year by whichever is highest: inflation, the increase in average earnings, or 2.5 per cent. At the 2015 election, Cameron pledged to keep it in place until at least 2020. Now Hammond says that it may have to be scrapped at the next election.

The response from John McDonnell, the shadow chancellor? To back the hike in the 40p rate and to pledge that Labour will maintain the triple lock until 2025. He’s thrown in a swathe of guarantees to pensioners as well: TV licenses, the winter fuel payment and free bus passes will replace in place and without means-testing until 2025 at the earliest.

The politics of this are fraught. Although politicians often like to throw around the phrase “hard choices” like confetti, the choices for Labour on this really are hard. If the party can’t win back some of the over-65s – Labour lost this group by 24 points in 2015, as opposed to a mere six points in 2005 – it will never win an election again. But as one senior supporter of Liz Kendall observed to me recently, the state “already spends too much on the old and not enough on the young”.

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Labour faces a Catch-22: if it promises to redistribute from the affluent elderly to the straitened young, it will never win power to redistribute from the old to the young. If it promises not to redistribute from the old to the young, it may win, but it won’t redistribute.

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With the 40p rate – which, as I’ve written before, benefits only the comfortably-off – again, Labour is going to have to make inroads into this group to win again.  The politics of any income tax rise are dangerous for Labour. At every contest since 1979, with the exception of 2010, Labour has either promised not to hike income taxes and won, or promised to raise them, and lost. (In 2010, the party had broken its 2005 promise and increased taxes, but pledged not to do it again.) And although the pledge to increase taxes was not the only thing that went wrong for Scottish Labour in 2016, it is striking that an explicitly leftwing offer not only from the national leadership but from the Scottish party as well met with heavy defeat.

In the New Labour years, fiscal drag papered over the cracks. (Essentially, people got richer, and paid more tax without Labour having to go into an election promising to raise them.) The Conservative threshold raise, as well as giving more and more money to the rich, will further reduce the amount of money flowing to the state, leaving Labour with the tricky question: go into an election promising a tax rise, or severely limit the horizon of what it can do in office.

So the politics of both backing the 40p rate change and handing out goodies even to affluent pensioners make sense. But when you add that to the party’s commitment to McDonnell’s fiscal rule – maintaining a day-to-day surplus while having more wriggle room to borrow to invest – it means that for Labour to keep its promises, it will have to enact further, heavy cuts to social security for working-age people.

And again, the electoral case for this is strong. Labour won’t win if it’s not trusted to run the economy, and crucially not to “overspend”, as voters believe it did in its last stint in government.

The problem, I suspect, is that this won’t work for McDonnell with swing voters for the same reason that party activists aren’t kicking off: neither group really believes that the shadow chancellor intends to keep these promises. But if it doesn’t, the problem for his successor remains the same as  his: how to win office without sacrificing power.