Fantasy Budget: The real options open to Osborne

Former Treasury official, James Dowling knows, first hand, what the upcoming budget marathon is all about. Here are George Osborne's options as he sees them

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Osborne has a new box, but the same old problems
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James Dowling
On 22 February 2012 09:52

Towards the end of February onwards, political speculation increasingly turns towards the Budget. We have already had forays from the Liberal Democrats - notably with Nick Clegg's attempt to negotiate in public by suggesting an immediate increase in the personal allowance, to be paid for by further crack-downs on the better off. Danny Alexander then followed up on this by suggesting that the Government might want to look again at Labour's barmy scheme to remove higher-rate relief for the better-paid – except this time aimed at those earning £100,000 instead of £150,000.

More recently, Ed Balls has pitched in by suggesting that the Government should provide an economic stimulus by cutting VAT or income tax. If I were a betting man, my money would be going elsewhere, if for no other reason than Ed Balls has suggested them.  

While at the Treasury, I was for three years head of the Finance Bill Team. My first Finance Bill (in 2008) abolished the 10p rate, among many other sins; my last was the first Bill of the new administration. In those three years, I increased the rate of VAT twice and reduced it once; reduced then increased capital gains tax; introduced a new top rate of income tax; and removed 1 per cent from corporation tax.

It was by some way the best job I have ever had. It was also comfortably the most stressful and punishing. The hours were very long indeed, and my girlfriend is rather happy I no longer make a habit of leaving work at around midnight. My former colleagues are some of the best in Whitehall – and they are just embarking on this year's marathon.

The above list of my policy and political highlights is of more than just historical or personal interest. It tells a story about the priorities of one party, in particular. Much of tax policy is fought over family or household issues – and it is no surprise, therefore, that Ed Balls has called for tax cuts in those areas –income tax and VAT – which most fit the 'squeezed middle' rhetoric. Politically, this is low-hanging fruit. But I think it significant that few of Labour’s tax spectaculars from later years were what could be termed business-friendly measures.

Nick Clegg and Danny Alexander's comments fit this mould as well – and although I think their suggested ways of paying for an increase in the personal allowance are a bit mad, they are at least trying, which puts them streets ahead of Ed Balls and his risible 5-point plan for growth.

The economic and political context – not least Moody's recent decision to put the UK's credit rating on watch – means that there is no space for unfunded tax rises. This suggests a relatively conservative Budget – much as was the Autumn Statement – with little leeway for a response to pressures on, particularly, income tax and growth.

The Chancellor will need to respond to the Liberal Democrat want to go further on the personal allowance – they have otherwise set themselves up for a very public fall. An immediate increase of the personal allowance to £10,000 must be off the table but there may be space to go a little further than the increase to £8,105 already baked into the Treasury's numbers.

Osborne could supplement this with, say, a route-map towards the £10,000 mark, setting out explicit milestones ahead of the election. If the Government wanted to go further – picking up on Alexander's wish to remove all those on the minimum wage from income tax, for example – they could always look to build this into any such route map. Tactically, I’d make the end point for any equalisation of the personal allowance with the minimum wage the other side of the election.

On the 50p rate, the Government cannot afford to withdraw it politically or, I assume, fiscally. However, they might be able to announce the conditions under which it will be withdrawn. Osborne could, for example, say that they will keep revenues under review and remove it at the point that it stops bringing in sufficient. Or tie its withdrawal to the elimination of the deficit.  

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