Budget 2012: A strategic and substantive victory for the Lib Dems

The big substantive Liberal Democrat wins that yesterday’s budget contained will be familiar to regular readers by now. However, I think it’s worth highlighting once again just how big a deal the increase in the personal allowance announced yesterday is. A rise of £1100 is unprecedented, and means that those earning the minimum wage and working full time will have seen their income tax bills halved because of the Liberal Democrats.

Before Nick Clegg intervened publicly back in February to call for the threshold to be raised faster than previously anticipated, the working assumption was that it would be raised by just a few hundred pounds this year.

Without that intervention yesterday’s budget would probably have been fairly forgettable – the wealthiest would have paid about the same and low and middle income earners would have got a small tax cut. But Clegg’s bold – and right – decision to go public with his demands elevated this budget to an important event.

In response to Clegg’s calls, the Tories decided to make the scrapping of the 50p rate their budget priority. Liberal Democrats made clear that such a move would not be countenanced without substantial increases in taxes on the wealthy over and above the cost of reducing the 50p rate. The Tories wanted the rate to reduce to 40p, but with a mansion tax vetoed by the prime minister, the much less expensive move to 45p was struck as a compromise.

The reduction in the top rate may have some economic significance and it is certainly politically very silly from the point of view of the Tories. But the actual fiscal effect is pretty small: it costs just £150m between now and the general election.

And the Lib Dem demands secured in return – clamping down on stamp duty avoidance and the introduction of a higher rate of stamp duty – raise £685m over the same period.

As well as the substance, though, the budget also vindicated the party’s new strategy of publicly negotiating with our coalition partners on the big issues. Not only did this strategy lead to the good wins on policy just discussed, it also means that the public can be very clear about who achieved what in this budget.

The Lib Dems secured a tax cut for those on low and middle incomes and tax hikes on the wealthiest, whilst the Tories got the reduction in the top rate. The public nature of the debate means little acrimony is caused by highlighting that very simply truth.

Public negotiation of this kind is the best way for the coalition parties to differentiate themselves from one another while continuing to work constructively together in government.

The challenge now is to keep up the strategy on budget issues – clearly prioritising the lifting of the threshold and a “real” mansion tax in return for any further reduction in the top rate of income tax – and also to begin to negotiate more publicly in other policy areas.

A long-standing Liberal Democrat policy formed the multi-billion pound centre-piece of the coalition’s 2012 budget. There’s more to do, for sure, but for a party with fewer than 1-in-10 MPs, that really is quite an achievement.

* Nick Thornsby is a day editor at Lib Dem Voice.

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7 Comments

  • Good luck arguing that on the door-steps….

  • Nick,

    I think you are right to highlight how big a deal the accelerated increase in the personal allowance is. This was the major plank of the manifesto that we all campaigned on in 2010.

    HM Revenue and Customs and the OBR appear to have provided substantial support for the controversial Laffer curve behavioural effect. If we are to be serious about evidence based policy making, on this issue we had little grounds for contesting the cut in the upper rate to 45p, outside of political posturing. The same would be true of objecting to the equalising of pensioners personal allowance over-time with those under 65.

    I think what sticks in the craw of many activists is the lack of recognition in messaging, that by far the great majority of median income earners and many of the lower paid will experience a net reduction in income/purchasing power after taking account the combined effect of tax and benefit changes. An additional 300,000 higher tax payers are created by lowering the threshold to £41.5k and child benefit withdrawals leave those earning between 50K and 60K with a 66.5% marginal tax rate. Benefit losses arising from the increase in working hours required for working tax credit could have been sensibly mitigated for the lower paid, by deferring this requirement until the introduction of Universal Credit next year.

    Overall, I think the budget was a considered response to what remains a very difficult economic scenario – we will still be borrowing 120 billion next year. Perhaps the major criticism would be the lack of a big job creation program, as cuts in the rate of corporation seem unlikely to deliver the necessary jobs anytime soon.

    The lesson, if there is one, is to be cognisant at all times of the impact of falling living standards when trying to get across the legitimate political message of LibDem wins in the coalition government.

  • Politically speaking, do you think it is wise to claim Lib Dem ownership of one of the most poorly received budgets I can remember?

  • Joe Bourke

    I do not think that HMRC and OBR have endorsed this data – they have had a guess but when you hear Chote, for example, interviewed he is less than convincing.

    Don’t start quoting this Laffer Curve nonsense – do you honestly expect us to swallow that the tipping point is between 45 and 50%?

    The elephant in the room is growth. Estimations for 2%+ next year and 2014, 2015 look very optimistic and, to be honest, saying the OBR agrees is a bit of a joke with their current record.

    Current indicators, retail sales (the gleefully received January figures rounded down significantly and poor February) and latest borrowing all pointing to a looming problem.

    Can you also give us an idea where the 10bn in welfare savings is coming from?

    How far the LD have fallen!

  • Basaac,

    The Laffer curve has always been a disputed concept, but this is the first time, I am aware of, that such an explicit analysis has been prepared. I must admit that I too was surprised by the extent of the reduction shown by the HMRC. I would not conclude from the report that the tipping point is between 45 and 50%. However, I do accept that a 45% top rate is more inline with other G20 countries. Taxpayers will make significant efforts to reduce tax even at the 40% level, if they are able.

    My own working experience with tax planning and administration going back to the 1970’s makes me cautious about the effectiveness of higher rate taxes generally. Any tax system where there are different rates of tax on different levels or sources of income leads to tax arbitrage to reduce taxation and always will. It is for this reason, that I have long favoured a minimum income guarantee in place of personal allowances and means tested benefits, a flat tax combining tax and NI and a property/land value tax to replace higher rate taxes.

    I can’t dispute your view that the growth figures look optimistic, particularly further out, or that low growth will leave
    with a serious hole to fill. Let’s hope the OBR turns out to be right on this.

    As for 10 billion savings in welfare spend- that does not appear realistic in present circumstances. I think we would need to look at clawing back the 7 billion of higher rate pension relief and increases in the capital gains tax rate before looking at further benefit reductions.

  • Joe

    Thanks for the response

    I am not sure that any analysis of the 50% is valid due to the massive movement of salary into the 2009/2010 tax year to avoid it – clearly this will again happen. The data would only be robust after a few years of operation – this is why it is a guess and I imagine the margin of error is huge (basing it on one year gives only one point of reference)

    The decision was clearly political but it could not be sold as such as that would have been unacceptable in the current climate. Hopefully it will still be seen as unacceptable.

    50% tax rates may/may not work but cutting 10bn of welfare is a worse policy than keeping 50% but he seems happy to grasp that nettle.

  • Richard Dean 23rd Mar '12 - 2:16am

    I’d be very surprised if HMRC and the OBR have actually got data supporting the Laffer effect. For one thing the data they have is likely to have been affected by many factors and the effect they see may not necessarily be due to tax rates. For another, I simply don’t believe they are as independent as they think. And there’s a book by a professor that offers 39 reasons for the financial crises, one being that what is taught in economics schools is wrong!

    The focus on high-tech, long-term job creation, such as via HS2, Broadband, and renewable energy, seems totally at odds with the present, urgent need to create jobs NOW, and probably with a focus on people with FEW skills and limited ability to travel to work. That means focussing investment on things that may not seem so attractive or understandable to the clean white shirts in the treasury!

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