Opinion: Time for that Lib Dem tax cut in full?

“Under a Liberal Democrat government, you will not have to pay any income tax on the first £10,000 you earn.”

So said the manifesto on which we fought last year’s election. And while we didn’t get a Liberal Democrat government, we did get the policy.

The coalition agreement commits the government to making real terms steps each year towards the target of £10,000, kicked off by an initial increase of £1000, benefiting the low paid by £200 this year.

But should we be moving faster?

Recent economic growth has, of course, been weaker than expected – no surprise given the circumstances. The events of 2007-8 are not called a financial ‘collapse’ for nothing, and when a building falls down, you don’t just wake up the next day, or the next year, with a nice, shiny new one. Rebuilding takes time.

Add to that the high inflation rate, caused primarily by the spike in oil prices, affecting as they do the price of day-to-day essentials (food, transport, energy), and it’s clear for anyone who’s willing to look why consumer confidence is low and growth sluggish.

The amount policymakers can do to affect this situation is inevitably limited, and the government is already doing much of it: getting the banks lending, cutting unnecessary red tape and launching initiatives like the green deal and the green investment bank.

But there is another thing the government could do, as the IMF mooted last week: they could let the people that are being affected by the squeeze on household budgets keep more of the money they earn.

Inflation is not so much a problem for those whose budgetary decisions don’t involve choosing between essentials and everything else. The wealthy can absorb price increases; the worst off can’t.

So why not do what the coalition agreement says, but instead of doing it gradually, do it now? Why not raise the income tax threshold to £10,000 today, and give the parents who work 40-hour weeks for the minimum wage a break?

If this government wants to be defined by its boldness, it couldn’t get much bolder than that.

Helping out the low-paid, stimulating the economy and implementing a key coalition pledge all at once, just by jiggling the plans around a little.

And what’s more, given how little the government is being charged to borrow money thanks to its deficit reduction plans, why not make it even more of a stimulus by borrowing the cost of the tax cut for a year? Our manifesto put that cost at close to £17 billion, though it will now be less given the progress already made.

Then, when he delivers his budget next year, the Chancellor can make the policy revenue-neutral by increasing taxes on expensive property, unearned wealth and pollution.

So, how about it – time to implement that Lib Dem tax cut now?

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45 Comments

  • Then, when he delivers his budget next year, the Chancellor can make the policy revenue-neutral by increasing taxes on expensive property, unearned wealth and pollution.

    You think a Tory would do this?

    What would happen is that the Chancellor would use the ‘savings’ from other cuts, which naturally fall on the most needy, top justify not raising taxes for high earners. It’s what Tories do. It’s their reason for being, what their entire party is about, shrinking the state and cutting taxes.

    How can you not know this?

  • g,

    “You think a Tory would do this”

    No, But a Tory in coalition with a Lib Dem has said he would. We need to make sure that he does.

  • Colin Green, it would be very naive, stupid even, to trust the word of any politician, but especially a Tory who is a strategic thinker and represents a party that hates the Lib Dems and hates being in coalition with them. It’s best you think of them as bastards who can and will seek to destroy you when negotiating.

  • “Recent economic growth has, of course, been weaker than expected – no surprise given the circumstances. The events of 2007-8 are not called a financial ‘collapse’ for nothing, and when a building falls down, you don’t just wake up the next day, or the next year, with a nice, shiny new one. Rebuilding takes time.”

    Sorry but weren’t the expectations made after the the collapse….

    “Add to that the high inflation rate, caused primarily by the spike in oil prices”

    Not to mention the VAT “bombshell”

    Other than that I would love to see the threshold raised to 10K For many this may end up being a change from top up benefits to earned pay, but I do see real advantages to this approach both for the state and the individual.

  • I’m afraid I agree with “g”.
    What would the compromise be? the removal of the 50p rate seems to be what most of the Tories are asking for.

    I think our current policy of keeping our heads down and letting the Tories hang themselves seems to be the best way forward

    But please do not have any of our guys fronting the higher education white paper, Let Willetts take the hit! Remember it’s our policy to remove tuition fees. The line “It’s a good accountancy wheeze that makes the deficit look better” is a line only the conservatives should be spouting. As is “Its very progressive that those working class families that are slightly better off should pay for those who aren’t and we will be acting like loan sharks and stopping them paying back early as well whilst those middle/ upper class students will either get mummy and daddy to pay up front or if they are not bright enough buy a place.” is not something we should be suggesting is a liberal policy.

  • How about staggering the £10,000 pa for particular parts of scoiety under specific pressure – such as giving the full 10K next April to, say, low ranking members of the Armed Forces, or low paid public service workers?

    This would be making good on the Coalition Agreement pledge ahead of time for those who most need it.

    Could set up a them and us situation but worth a thought.

  • Mark Pack Nick Thornsby 10th Jun '11 - 1:37pm

    @Duncan

    I did consider whether I wanted this article to propose another round of fiscal stimulus, and increased borrowing, and decided to include the suggestion as an interesting debating point(!).

    But actually I don’t think it is too unrealistic. The key priority regarding the deficit was (is) not to eliminate the structural deficit in 5 years instead of 6 (for example) – the pace of deficit reduction is inevitably arbitrary, and there are advantages and disadvantages to fiscal consolidation happening more slowly or more quickly.

    But the key thing was to set out a clear plan last year – as the Lib Dems always argued, actually – so that the public and the markets knew what the government’s intentions were. But now we have set out the general direction of travel, and demonstrated a clear willingness to do the difficult things, there is no reason why the government can’t decide to mix things up a little, within that general framework.

    So, yes, I suppose I am saying that the deficit reduction plan allows us to increase the deficit for a bit.

    And of course, at some point soon, the chancellor would have to work out how to pay for the tax cut, but he’s going have to do that anyway, so why not do it sooner rather than later?

  • I’m inclined to agree with Geoffrey Payne. £10k allowances are probably a good policy in themself, but as with any rebalancing the question always has to be who pays? We urgently need to move the burden of tax to wealth (yes, including granny with £800k houseprice inflation) away from earnings, but I can’t see it happening.

    More generally though, there is one option that used to be something of a Lib Dem flagship, but which seems to have dropped off the radar – Council Tax reform. Why is this no longer discussed? Whilst I did not care for the idea of a local income tax, the idea of changing the funding of local government was a sound one and it is a shame that momentum was lost.

  • LondonLiberal 10th Jun '11 - 2:17pm

    nick, i have recently been thinking exactly what you’re advocating, following the IMF’s report. We should put pressure on our MPs to make this issue climb up the coalition agenda even faster than programmed.

  • The government/BoE are stoking inflation – so by the time we have the 10K threshold it will only be worth 8K anyway.

  • Andrew Duffield 10th Jun '11 - 3:41pm

    @ Alistair

    Correct.
    The apparently abitrary figure of £10k was originally chosen as it approximated an annualised fte minimum wage. The sustainable solution is to peg the income tax threshold to the 12-month minimum wage equivalent.

    Longer term of course, we should be aiming to raise the threshold to average earnings levels, and beyond – all perfectly affordable with an “unearned income tax” for government to switch to, and for LA’s to precept, – in the form of a national LVT.

  • Andrew Duffield – LVT is a very attractive option, my question though is whether anyone would ever vote for it. I can’t see it, but I’d love to be proved wrong.

    If done properly, we could abolish Council Tax in its current form totally.

  • @Simon McGrath
    “You mean we should be saying to people in the private sector who actually pay for the public sector that we will be discriminating against them?”

    That’s the kind of nonsnese I’d expect from a Daily Mail reader. Do you seriously believe that’s how the economy works? Using the same logic, it could be equally well argued that the public sector pays for the private sector. In reality they’re both a part of the same economy and live off each other – the difference is that public expenditure is democratically accountable, whereas the (often very limited) choices of individuals and organisations determine where money is spent in the private sector. To say that one sector pays for the other is puerile.

    “tax cuts are always weclome”
    Are you sure you’re a Lib Dem and not some far-right American nut-job? Tax cuts are welcome to whom exactly? At the risk of stating the bleeding obvious, cutting taxes whilst running a deficit makes the deficit worse. To make a blanket statement saying that tax-cuts are always welcome is risible.

  • matthew fox 10th Jun '11 - 6:15pm

    With the Coalition borrowing a record amount in April, £10 Billion as a matter of fact, the scope for tax cuts is limited.

    Then again glossing over the fact that the VAT increase increased inflation, does help the author.

  • Andrew Duffield 10th Jun '11 - 7:34pm

    @ Duncan

    LVT has been voted for by local municipalities across the world. Indeed, it has never been rejected in a popular vote, only being overturned when rent-seekers get into office and repeal it without a referendum.

    The key is for LVT to REPLACE economically damaging taxes on income and investment, stimulating growth accordingly. Voters who like the idea of hanging on to more of their hard earned money support it; those who live off the earnings of others hate it. However, if LVT can be successfully sold elsewhere, I’m damn sure we can do it here too.

  • Although the £10k would cost a lot now, since it has been budgeted for by the end of the parliament, the cost is a very short term cost. Compared with the cost of linking pensions to earnings/prices/2.5%, for example, the total cost is very small.

  • “Recent economic growth has, of course, been weaker than expected – no surprise given the circumstances”

    If something is weaker than expected, then surely it must be some sort of surprise.

    If you get what you expected, that’s no surprise. If you get something other than you expected, then that’s got to be a surprise.

  • Simon McGrath 11th Jun '11 - 6:56am

    @Steve “You mean we should be saying to people in the private sector who actually pay for the public sector that we will be discriminating against them?”

    That’s the kind of nonsnese I’d expect from a Daily Mail reader. Do you seriously believe that’s how the economy works”

    Er, where do you think the money comes from to finance the public sector? It comes from the private sector. Every single doctor/soldier/social worker /five a day coordnator is paid by the private sector. Surely this is obvious?

    fascinating that you think someone who wants lower taxes for the low paid is a ‘far right american nut job’

  • @Simon
    OMG, you’ve still don’t understand basic economics and have just repeated the inane drivel you spouted earlier.

    “Er, where do you think the money comes from to finance the public sector? It comes from the private sector. ”

    Er, where do you think the money comes from in the private sector? For starters, I presume you’re referring to expenditure, rather than money; the central bank creates money. People in the private sector and public sector spend the money they receive in wages in both the private sector and public sector (through their chioces and through taxation). The money they received in wages came from the money people spent in the private and public sectors through their spending choices and through taxation. It’s not a difficult concept to understand.

    “Surely this is obvious?”
    It’s only obvious if you have absolutely no idea what you’re talking about and are prepared to repeat the childish, knuckleheaded cliches that Dail Mail readers believe.

    “fascinating that you think someone who wants lower taxes for the low paid is a ‘far right american nut job’”
    Don’t distort my words you ignoramus. You said: “excellent piece. tax cuts are always weclome”. There was no mention of the low paid.

  • “five a day coordnator ”

    I skimmed over htat bit earlier without looking closely. You really are a cliche-spouting DM reader.

  • Simon McGrath 11th Jun '11 - 7:51am

    @steve, dearie me what a nasty piece of work you are.
    Where do you think the money comes from to pay the wages of people in the public sector from which they pay their taxes comes from? where do you think the foreign exchange needed to pay for our imports comes from?

    the article is about tax cuts for the low paid

    you don’t have to be a mail reader to think that not every one of the 600,000 extra people labour employed was doing something useful .

    By the way you still havent explained why you think it would be fair to take workers in the public out of tax but not those on the same wage in the private sector?

  • @Simon McGrath

    I’m not the nasty piece of work here. You are the one that came out with a complete falsehood (that the private sector pays for the public sector) to justify your prejudice.

    Again, you have distorted my words and used a straw-man argument: “By the way you still havent explained why you think it would be fair to take workers in the public out of tax but not those on the same wage in the private sector?” I haven’t commented on that suggestion, which was put forward by another poster, Greg.

    I responded to your comments:

    1, “excellent piece. tax cuts are always weclome” – no mention of the low paid.

    2. “You mean we should be saying to people in the private sector who actually pay for the public sector that we will be discriminating against them?” – ignorant drivel.

  • Sorry for hogging this blog (and going off topic), but the amount of deliberate lies spread by the media about the public sector need to be challenged:

    @Simon McGrath
    “Where do you think the money comes from to pay the wages of people in the public sector from which they pay their taxes comes from? ”

    I seriously can’t believe that you’re not intelligent enought to realise that you are completely wrong. Where do you think the money comes from that the private sector receives from selling goods and services to the public sector? If I were to conclude, on the basis of that argument, that the private sector is solely funded by the public sector then I would be a complete numpty. In reality, neither the public sector, nor the private sector, creates money – they both use money to purchase goods and services off each other – they are both part of the economy. To suggest that the private sector pays for the public sector is grossly ignorant and infantile.

    Besides, simply stating private sector = good, public sector = bad (as you are doing) looks rather deluded in the face of an economic crisis caused by the private sector (the national deficit is a smaller, by-product of the profligacy of the private sector and individuals – personal debt in the UK is greater than the national debt – it was the sharp increase in personal debt and the spending projections based on the resulting unsustainable tax revenues that has left us with the large deficit). The deficit, in effect, was caused by those in charge of the public spending having too much faith in the private sector knowing what they were doing (this belief stemmed from the predominant faith-based ideology that the private sector is always right).

  • Not to mention the fact that the government actually spends more of its tax revenue on outsourcing to the private sector than it does on the public sector wage bill…..

    Not to mention the fact that government spending is presently lower than it was for much of Thatcher’s time in office…

    But why let the facts get in the way of having a good go at those five-a-day co-ordinators in the public-sector.

  • Mark Pack Nick Thornsby 11th Jun '11 - 10:53am

    @Steve

    Would you care to provide some evidence for your assertion that public spending is now lower than when Mrs Thatcher was prime minister?

  • Simon McGrath 11th Jun '11 - 10:54am

    @steve , little point in arguing with you since you appear to lack the most basic understanding of economics , nor any desire to acquire such knowledge.
    But as a simple matter of fact nowhere have I said that “private sector = good, public sector = bad”.

    The deficit was caused by labour recklessly spending borrowed money to try to bribe the voters and entrench a dependent public sector workforce. If you look at the leaked documents in the Telegraph you will see they were warned in 2006 that the increased spending was not leading to imporved services but carried on spending regardless.

  • @Simon McGrath
    “little point in arguing with you since you appear to lack the most basic understanding of economics , nor any desire to acquire such knowledge.”

    Unbelievable ignorance. Is it that you have no shame or no awareness of what you’re talking about?

    “The deficit was caused by labour recklessly spending borrowed money ”

    So if they were recklessly spending borrowed money in 2006, how come the national debt was lower than when they came to office in 1997?

  • @Nick Thornsby
    Happy to do so:

    http://www.guardian.co.uk/news/datablog/2010/apr/25/uk-public-spending-1963

    According to those figures, public spending is less than the peak of 48.1% of GDP achieved by Thatcher in 1982-83.

  • @Simon McGrath
    Can you please point me to a reference in an economics textbook that states that the private sector pays for the public sector.

  • Mark Pack Nick Thornsby 11th Jun '11 - 11:36am

    @Steve

    A couple of points. First, public spending in relation to GDP is a relatively unhelpful metric – public spending in the Thatcher period you refer to was £138bn a year. It’s now £700bn. Quite a difference.

    Second, public spending only became such a high proportion of GDP at that time because GDP had just massively shrunk in the recession – hence why public spending as a proportion of GDP is an unhelpful metric.

  • @Nick Thornsby
    “A couple of points. First, public spending in relation to GDP is a relatively unhelpful metric – public spending in the Thatcher period you refer to was £138bn a year. It’s now £700bn. Quite a difference.”

    You’re not being serious are you???? Have you heard of a thing called inflation?? Public spending, national debt and deficit are always measured as a percentage of GDP as that is rightly judged to be the most helpful metric. Quoting the nominal amount of spending in 1983 compared to the nominal amount today means precisely nothing.

    “Second, public spending only became such a high proportion of GDP at that time because GDP had just massively shrunk in the recession – hence why public spending as a proportion of GDP is an unhelpful metric.”

    Er, the same argument applies now then. However, and it’s a very big however, the coalition plans to reduce public spending to ~40% of GDP by then of the term of parliament would leave public spending at a lower level than all but the last two years of Thatcher’s time in office.

    Ideology, Ideology, Ideology.

  • Sorry,
    “by then of the term of parliament..”
    by the end of the term of this parliament..

  • Mark Pack Nick Thornsby 11th Jun '11 - 2:43pm

    @Steve

    Are you saying, then, that spending was, in real terms, higher in 1982 than it is in 2011?

  • @Nick Thornsby
    Public expenditure was clearly (slightly) higher as a percentage of GDP in 1982. Over the intervening years, the money supply and GDP have grown. Are you advocating that public expenditure shouldn’t be measured in such terms?

    Measuring public expenditure as a percentage of GDP is standard practice – see for example the wikipedia page on Government Spending: http://en.wikipedia.org/wiki/Government_spending

    @Simon McGrath

    As an example, imagine a simple model of an economy where everyone spends what they earn during their lifetime and 70% of the population work in the private sector and the tax rate across the public and private sector is fixed at 30%. The average gross life-time earnings (LE) is equal in both private and public sectors.

    Gross expenditure by the private sector employee in the private sector = 0.7LE
    Gross expenditure by the public sector employee in the private sector = 0.7LE
    Gross expenditure by the private sector employee in the public sector = 0.3LE
    Gross expenditure by the public sector employee in the public sector = 0.3LE

    Average expenditure in a particular sector per head of population = sum of the products of the proportion working in the different sectors x gross expenditure in the particular sector.
    Therefore,
    Average expenditure per head of population on the private sector = (0.7*0.7)LE+(0.3*0.7)LE = 0.7LE
    Average expenditure per head of population on the public sector = (0.3*0.3)LE+(0.7*0.3)LE = 0.3LE

    It all balances out (in this rather primitive model). Please tell me you understand. I’d like to go to bed this evening in the knowledge that you understand that the private sector does not pay for the public sector any more than the public sector pays for the private sector (they both pay for each other as that’s how economies work, with different people exchanging money in return for different goods and services).

  • Malcolm Todd 12th Jun '11 - 9:41am

    @Nick
    I think it’s quite clear that Steve is saying that spending is higher as a proportion of the economy than it was in 1982. If by “in real terms” you mean relative to inflation then I’m sure it’s not – but that’s almost as meaningless as measuring it in purely nominal terms. Unless you think that public sector wages, for example, should never grow faster than inflation, regardless of the growth in incomes in wider society; or that public services should not be improved in line with improvements in other services.

  • @Nick Thornsby
    “I suppose it is helpful if you have an ideological belief that government spending should always be kept at a certain proportion of GDP ”

    So, do you therefore believe that all the world’s economists use the GDP measure because they are guided by an ideological belief about keeping spending at a certain percentage of GDP?

    The reason I raised the issue of the level of government spending was because of Simon McGrath’s assertion that it was Brown’s profligacy that was responsible for the deficit. In that context, it was well worth countering that assertion by looking at the historical record which shows that current spending (despite the contaction in GDP) is lower than it was under Thatcher in 1982-83 and the level of contaction in spending the coaltion is aiming to achieve by the end of the term of parliament would leave it at a lower level than the majority of Thatcher’s time in office. At a time when the ‘profligacy’ argument is being used by certain individuals to justify the spending cuts in the public sector then it is surely right to actually look at the actual data to place current government spending in context? Otherwise, all we are left with is nothing more than the kind of arguments you would find in the right-wing press (whose motivations appear to be informed by a hatred of the public sector).

    I think everyone agrees in achieving better value for money with public spending – I’ve never come across anyone that argues for more wasteful spending. Some people argue for a bigger public sector, some for a smaller one. Some people argue for different ideas about achieving value for money. However, Simon McGrath”s argument was about Brown’s role in creating the deficit, but the management of the public accounts is an issue of financial and economic planning rather than about mechanisms for achieving value for money (the only evidence presented by Simon McGrath to this effect is that he thinks the government employs five-a-day co-ordinators). However, I think there are areas of public spending where we should be also looking at maintaining the same percentage of GDP devoted to particular areas. One such area is health, where we might be able to achieve the same results as 20 years ago with a lower proportion of GDP expenditure, but we could achieve more with the same level (bearing in mind that a finite health budget always has to be prioritised on the basis of cost and expected clinical outcomes).

    I find it tedious to keep hearing the cliches about Brown and the public sector that I would expect from the right-wing tabloids. It makes me think there is no difference between the lib dems and the tories and it puts me off voting for you again (if I wanted tory I’d vote tory). I would expect to hear people say that the private sector pays for the public sector in the comments section of such tabloids (such an argument is factually untrue – it’s not a matter of opinion).

    I’m no fan of Brown – I detest Labour for turning a blind eye to the credit-bubble that fuelled the obscene rises in house prices (that led to the ensuing public accounts deficit, amongst other by-products). It was obvious it was going to end in an economic downturn and it was obvious that it was bad news for the younger generations. However, Brown’s prudence in paying down the national debt in the first few years in office left the Country in not too bad a state when the financial crisis hit (things would surely have been worse if the national debt in 2007 was higher than when Labour came to power in 1997? No?). I also welcomed the increased spending on the public sector (and why not?). It is often the public sector, through the universities, that are responsible for creating growth in the UK by carrying out world-leading innovation – what innovations have the financial services industry come up with in the last decade? – CDOs, crap pensions and 125% mortgages. Yet, these scoundrels (that skim money from the productive economy through their cartels and rent-seeking behaviour) have been bailed out whilst those that do play an important function in creating future growth in education and research (and played no part in creating the problems) have their funding cut-back by a government (supported by their mates in the media) on am ideological crusade against the public sector.

  • I missed out the ‘r’ in contraction twice there – I do know how to spell it, honest

  • It is time! The time is NOW!

    I have yet to see the promised restoration of the link between Pensions and salaries promised for April 2011. My bank statement certainly does not record any increase in my public sector pension. This is very bad considering we have already had our pensions frozen for the last two years.

    When is the much trumpeted “triple-lock” going to start to kick in?

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