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26 January 2012

Clegg gambles on a tax cut

Deputy PM calls for Osborne to accelerate introduction of a £10,000 personal allowance.

By George Eaton

Nick Clegg’s intervention this morning is possibly his boldest since entering government. With the economy on the brink of recession and family finances in “a state of emergency”, the Deputy PM will use his speech to the Resolution Foundation to call for George Osborne to go “further and faster” in raising the income tax threshold to £10,000. While Osborne has pledged to reach the target by the end of the parliament (the personal allowance is due to rise from £7,475 to £8,105 this April), Clegg wants him to meet it now.

It’s all part of the Lib Dems’ differentiation strategy, with the Deputy PM championing a policy that, lest we forget, first appeared in his party’s manifesto. And the stakes are high. Should Clegg succeed, he will have concrete proof of Lib Dem influence. Should he fail, he will be mocked for his impotence.

The Treasury has distanced itself from the proposal this morning, describing it as an expression of Lib Dem priorities, not government policy. But Tory MPs, many of whom felt the pledge should have appeared in the Conservative manifesto, have reacted more favourably. Zac Goldsmith, Gavin Barwell and Justin Tomlinson have all posted supportive tweets.

But it’s not hard to see why those directly responsible for the nation’s finances are more sceptical. For one thing, with Osborne averse to “unfunded tax cuts”, where would the money come from? The Tories have already vetoed Clegg’s preferred option – a mansion tax – and are unlikely to accept demands for further green taxes, another possibility floated by the Lib Dems. More promising, perhaps, is Clegg’s call for measures to close stamp duty loopholes and clamp down on tax avoidance but would these raise enough? By most estimates, the policy would cost around £11.5bn per year.

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Nor can Clegg expect much support from Labour, which rightly argues that a VAT cut would be a more effective stimulus. Too many taxpayers will simply bank the money they save and the policy will do nothing for the three million households that earn too little to pay income tax, including many pensioners and part-time workers.

But the Deputy PM’s intervention is at least evidence that some in government realise that it must depart from the script. As real incomes are continually squeezed, the state must act to relieve the burden.