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22 April 2002

And for my next trick . . .

Budget 2002 - The juggler has done it again. A bit more for the poor, a lot more for public

By Donald Hirsch

For five years, Gordon Brown has been performing an impressive juggling act in reconciling ambitious tax and spend objectives, without deviating from his self-imposed rules on borrowing. The three main balls he has kept in the air are redistribution, rising spending (on key services) and reassuring Middle England on tax. In his latest Budget, the third ball wobbled but, contrary to every pundit’s forecast, did not fall. In the circumstances – possibly the least favourable economic circumstances that Brown will face – this was yet another bravura performance for our conjuring Chancellor.

Of the three balls he keeps aloft, redistribution is the least talked about, but the most radical. In Budget after Budget, the Chancellor’s largesse has landed primarily in the laps of the worst off – particularly those of poorer parents and pensioners. This Budget was no exception.

Many of the multitude of tax credits had already been announced and represented no extra cash (beyond inflation) that we did not know about, but the momentum of growth in these benefits was largely maintained. But two particular announcements stood out. One was that in the merger of benefits and tax credits for children next year, into the Child Tax Credit, child allowances for out-of-work parents are being levelled up to those for working families. Another was the proposal to index these entitlements to earnings rather than prices for the remainder of the parliament. Like pensioners, families with children are now having their minimum incomes locked into rising prosperity, having fallen scandalously behind during the increases of the 1980s.

Unusually, though, Brown’s timing was spectacularly bad. Six days before the Budget, the government published the first real data showing how much of a dent all of its redistribution has made on poverty. The figures were revealing. On their own, Budget measures would have reduced the four million children in poverty by well over a million. Yet only half a million have in practice escaped relatively low incomes, not least because rising living standards create a moving target against which poverty is measured.

This is absolutely not a sign that the government has failed in its war on poverty. In fact, for the first time in a generation, the poor have gained slightly more than the rest of the population during a period of rapidly rising prosperity. More often in recent times, the fruits of the good times have gone to the rich and the brunt of hard times has fallen on the poor. The continuation of redistributive policies in this year’s tougher Budget was promising. One thing the government ought to have learnt from its first term is to avoid extravagant targets – abolishing child poverty over 20 years is looking less attainable as each year passes – and rather show its commitment by keeping things moving steadily in the right direction.

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In juggling the second ball, spending on public services, a sustained commitment is even more important: despite first-term rises averaging 5 per cent in health spending, the public has yet to notice a dramatic improvement. Brown rose to that challenge in this Budget, increasing the commitment to 7.4 per cent a year in real terms over the next six years, audaciously assuming (to Tory fury) that his party will still be in power at that time. And education also got a guarantee that it would receive a rising share of national income in this parliament.

It is hardly surprising that, to afford all this in a slowing economy, Brown’s third main task of reassuring the middle classes has been trickier this year. But while rises in direct taxes marked a significant departure, they were hardly the return of tooth-and-claw socialism that some had predicted.

The most significant change was to put a penny on the national insurance contribution rate. This was a modest swipe rather than a kick in the teeth to Middle England: its effect was roughly to take back the nice little handout of a 1p cut in income tax that was brought in three years ago. A bigger hit, wrongly forecast by the pundits, would have affected a group that they, also wrongly, referred to as “middle England”: those earning £30-35,000 a year. They would have suffered most had the upper limit on national insurance (£30,000) been raised to the point where higher-rate tax kicks in (£35,000).

All the sob stories about this hard-pressed bunch and dire warnings of electoral fallout failed to take account of the fact that, of 21 million basic-rate taxpayers, only the richest million or so earn this much. As shown by the graph, the biggest concentration of voters earn £20,000 a year or less. Perhaps all the interviews with disgruntled men driving Mondeos through Essex helped let them off this time.

What really matters for the better off is that the 1 per cent extra on national insurance contributions applies to all income, including that above the upper limit. This has roughly the same effect as raising the higher rate of tax from 40 to 41 per cent, making a rather modest imposition on the means of the 15 per cent of taxpayers best able to afford it. Soaking the rich has certainly come a long way since Denis Healey’s 98 per cent marginal rate on investment income and even since the 50 per cent top rate proposed by John Smith in 1992. In fact, they got a considerably wetter soaking from the steady removal of mortgage tax relief during the 1990s, a task completed by Labour, but initiated by one Kenneth Clarke.

The modesty of these measures did not stop Brown from going out of his way to appease middle-class and, indeed, rich Britain in other ways. The one social measure he decided to highlight at the start of his speech was that all families with children earning up to £58,000 would be eligible for the new Child Tax Credit. The income thresholds for receiving help with childcare costs has risen so that a family with two children can still get up to £50 a week when they jointly earn £35,000. More out of character for Brown was the decision to freeze the income thresholds for paying tax and national insurance, so that as incomes rise, the tax burden will go up – a measure that disproportionately hits the poor.

Even as accomplished a juggler as Gordon Brown will not be able to keep up this act for ever. What he has done now is to buy time. Eventually, the cumulative effects of tax rises such as those announced in this Budget will start to hurt. The big gamble is that by then, finally, the billions poured into public services will have improved their performance so much that even a sceptical media and public will rejoice.

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