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  1. Politics
19 February 2012

Balls heightens the pressure on Osborne to cut taxes

Labour's new line: any tax cuts are better than no tax cuts.

By George Eaton

With the Budget now just a month away, both Labour and the Lib Dems are finalising their wish lists for George Osborne. By far the most interesting intervention in today’s papers is that of Ed Balls, who uses a column in the Sunday Times to put the case for tax cuts to stimulate the economy.

You’ll be familiar with Balls’s call for a temporary cut in VAT and a National Insurance tax break for small firms (both part of Labour’s ubiquitous five point plan for jobs) but should these demands fall on deaf ears, the shadow chancellor has a plan B. If Osborne “can’t bring himself to reverse his VAT mistake”, he writes, he has other options. For the same amount of money, he could “cut the basic rate of income tax by 3p for a year. Or raise the income tax personal allowance to over £10,000. Or increase tax credits for almost 6 million working people by around £2,000.” With the economy on the brink of a double-dip recession and unemployment heading towards three million, Balls rightly argues that some tax cuts are better than no tax cuts:

It would be better to cut VAT now – it’s fairer and quicker and would help pensioners and others who don’t pay income tax. But any substantial tax cuts to help households and stimulate the economy would be better than doing nothing.

By lending his weight to the Lib Dems’ key demand – an accelerated increase in the personal allowance – Labour’s Keynesian rottweiler heightens the pressure on Osborne to offer some relief. From his time as shadow chancellor onwards, Osborne has always opposed what he calls “unfunded tax cuts”. But many Tory MPs, sharing Arthur Laffer’s belief that tax cuts are self-financing, would like him to do nothing more than reduce the burden. And with the Chancellor likely to undershoot the OBR’s deficit forecast of £127bn by around £3bn, he will find it harder to argue that any giveaway would be fiscally irresponsible. The Institute for Fiscal Studies, for instance, has said that Osborne could cut taxes by £10bn without triggering a bond market revolt and a rise in interest rates.

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As Tory MP David Ruffley said of a temporary VAT cut:

Even if we can’t find the money for tax cuts from public spending savings, we could add it to the deficit and it is not going to send the markets into a tizzy, I don’t think anyone really believes that. The markets will not go haywire if there was a modest loosening in borrowing in the short run if it was for the right reason.

The Chancellor, an inveterate political schemer, will no doubt have something up his sleeve but with Labour, the Lib Dems and his own MPs all urging him to slash taxes it had better be something special.

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