Duncan’s Economic Blog

Nick Clegg’s Unfunded Tax Cut & Complacency

Posted in Uncategorized by duncanseconomicblog on January 11, 2011

Yesterday Nick Clegg appeared on the Today programme. He repeated the claim that back in May “Britain was the brink of bankruptcy”, a subject I dealt with over at Left Foot Forward.

But perhaps a bigger issue was his claims on income tax – he stated that his policy was to raise the tax free allowance to £10,000. So far the government have only announced a £1,000 increase in the personal allowance.

There are three issues here – first, as Howard Reed and Tim Horton have argued this isn’t the best way to combat poverty or to help the low paid. Most of the money goes to the better off, one reason that Guido refers to the policy as “a middle class tax cut”.

Second, as analysis by the Resolution Foundation (covered by Will over at Left Foot Forward) has demonstrated – what the government gives with one hand, it takes with another – higher VAT more than “compensates” for a higher tax free allowance.

But most significantly, as Faisal Islam yesterday, taking the personal allowance to £10,000 would cost an additional £11.5bn. £11.5bn (the near equivalent of another 2.5% on VAT) that has not been budgeted for.

I imagine we will soon get confirmation that the Deputy Prime Minister “misspoke” and that the £10k personal allowance is an “aspiration” not a “a policy”. I’m sure Mr Clegg would like to go into the next election offering just such a cut in income tax phased in between 2015 and 2020.

This does reveal quite a bit about how the coalition thinks – tough austerity now, then electoral hand outs in 2015.

Responding to bad poll numbers yesterday Tim Montgomerie tried an old trick – “you think an 8% Labour lead is bad, wait till its 20%”. That was  predictable; what’s more interesting is what the post reveals about the Tories’ economic complacency:

The economic cycle is on Cameron’s side. We should be in the upswing phase at the time of the next election. If the economic gods smile kindly on Cameron the UK economy will be ticking along nicely by 2013/14/15 and Osborne, Cameron and Clegg will be able to say they steered the UK economy through difficult times – without any help from Labour. It will be a powerful message. In the meantime there’ll be tough cuts, inflation, higher mortgage rates, internet-powered explosions of protest and, most worryingly, the potential for real €urozone problems. But we will get through it. Hopefully.

Essentially – “don’t worry, we’ll have two awful economic years now, but things will be fine by 2015, I hope” – is this the plan?


5 Responses

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  1. Tom W said, on January 11, 2011 at 10:15 am

    The really interesting thing about the Montgomerie post is it doesn’t even seem to attempt to claim that the Tory economic policy will produce good results. Merely that the economic cycle means things will be improving anyway, and the government will be able to *say* it’s down to them.

  2. Howard Reed said, on January 11, 2011 at 10:31 am

    Another great post Duncan (despite spelling my name wrong) 🙂

    Tim Montgomerie’s post amounts to hoping that the economic cycle will carry the Tories through – although I’d argue it’s economic *credibility* not the position in the cycle per se that matters. The Tories lost in 1997 despite a booming economy because, in the aftermath of the 1992 ERM crisis, no-one believed a word they said on economic policy anymore.

    If the OBR forecasts on the deficit turn out to be optimistic and Osborne has to announce additional cuts in public expenditure in (say) 2012 or 2013 then that is potentially a big blow to his credibility – by that point Labour would be able to say “we told you so”. Meanwhile, Alan Johnson needs to sit down with a mug of tea and a copy of HMRC’s tax ready reckoner and memorise those rates.

    • duncanseconomicblog said, on January 11, 2011 at 10:34 am

      Thanks! And corrected!

  3. Luis Enrique said, on January 11, 2011 at 11:40 am

    I really think it’s wrong to say “most of the money will go to the better off” for reasons I give here: http://liberalconspiracy.org/2010/03/19/data-abuse/

    if you look at the low-end of distribution of income for people who work full time – badly paid workers of the sort left wingers almost by definition want to help (the “Labour” party) – those are the ones that benefit from raising the income tax threshold. These individuals only look “better off” once you start comparing them to students, the unemployed, part-time workers etc.

  4. Luis Enrique said, on January 11, 2011 at 11:41 am

    ““don’t worry, we’ll have two awful economic years now, but things will be fine by 2015, I hope” – is this the plan?”

    if so the UK right wing has much in common with the US left wing.

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