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21 March 2012

Why raising the personal allowance is bad policy

Osborne's plan to increase the tax threshold is neither progressive nor an effective stimulus.

By George Eaton

George Osborne’s plan to raise the personal allowance to £9,205 from April 2013 [leaked last night, along with most of the Budget] is being hailed by Lib Dem supporters as a big “win” for their party and another step towards a “fairer” tax system. But the truth is that it is neither a progressive measure nor a particularly effective fiscal stimulus.

The policy does nothing to help the third of the adult population (such as part-time workers and pensioners) too poor to pay income tax and, partly for this reason, is a weak stimulus. The Office for Budget Responsibility has calculated that higher infrastructure spending, increased spending on benefits or a cut in VAT would all do more to boost the economy in the near-time [see p.95 of the June 2010 Budget]. Economic logic tells us that tax cuts targeted on low earners, who are more likely to spend, rather than save, any windfall, are the most effective stimulus. Yet contrary to the Nick Clegg’s claims, the biggest winners from the rise in the personal allowance are not the poor but the rich.

As the IFS has shown, those in the second-richest decile gain the most in cash terms, followed by the richest tenth, who gain marginally less due to the gradual removal of the personal allowance after £100,000 [a brilliant piece of stealth redistribution by Alistair Darling]. As a percentage of income, it is middle-earners who gain the most, with those at the bottom gaining by far less. At a cost of £3.3bn a year, the government has adopted a policy that does little to advance either economic growth or social justice.

Raising the personal allowance is great politics [a weekend YouGov poll found that 90 per cent of the public support it] but don’t be fooled: it is bad policy.

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