Tuesday, 13 May 2008

Tax changes: bad economics and bad politics

Can this government get anything right?

The reason I ask is that Alistair Darling's announcement today about raising the income tax personal allowance is, on the face of it, a clever way out of the hole Labour had dug itself into with the abolition of the 10p tax rate. The trouble is, it's precisely what he shouldn't have been doing. It's bad both politically and economically, and Vince Cable was absolutely right to say that it's a short-term gimmick.

I'll deal with the economic arguments first. The timing of the announcement was lousy, as it came on the same day that even on the government's preferred measure (ie the one it thinks makes it look best), inflation jumped to 3% from 2.5%. With public borrowing already at more than £40 billion this year, adding an extra £2.7 billion to the tab this year is a step in exactly the wrong direction. Borrowing should be reined in, not expanded to get the government through a spot of difficulty with its backbenchers.

Indeed, I could ask what's happened to Labour's so-called Golden Rule, in which they promised to borrow solely for the purposes of investment. Borrowing to give people a tax break seems to fall foul of that. (And yes, I know that the full promise is to do that "over the economic cycle", but that in itself is a meaningless New Labour term, as Labour have demonstrated by redefining what the economic cycle is and when it is measured from to suit their own purposes.)

The tax change is also bad politically. Although it seemingly lances the boil of the argument over the 10p tax rate, it does so at the expense of confirming Labour's reputation for short-termism, a party concerned solely with chasing headlines. Does anyone seriously imagine that Darling would have made his statement today if there hadn't been a by-election next week in Crewe and Nantwich in which Labour faces the prospect of losing a safe seat?

I can imagine Labour people protesting their innocence. "A by-election? Nah, weren't thinking about that in the slightest, hadn't even realised it was happening. The thought of any connection hadn't even begun to consider crossing our minds, guv, honest. Would we lie to you?" Of course, if Labour had showed proper decency and not called the Crewe and Nantwich by-election before Gwyneth Dunwoody had been laid to rest, people like me might well have been a bit less cynical.

One of the problems is that Labour has form in this area. Last autumn's pre-budget statement, for instance, included changes to inheritance tax which had clearly been under consideration for a long, long time and in no way were a panicky reaction to the Tories' seemingly popular move at their party conference to support raising the inheritance tax threshold to £1 million.

And it's not even as if this short-term political fix will work. For a start, I fully expect Labour to lose Crewe and Nantwich next week, as people in the constituency interviewed for BBC News didn't seem that impressed with Darling's pre-election bribe. Indeed, I don't think it's entirely implausible to visualise Labour finishing third in the seat.

But what Darling and Gordon Brown haven't grasped is that the whole 10p tax rate row is symbolic of their complete lack of vision. Many people thought that at least a Labour government could be trusted to stand up for those on low incomes and give them a helping hand. Instead, they've ended up with the grotesque chaos of a Labour government - a Labour government - scuttling round in ministerial limos handing out higher tax bills to its poorest citizens. Such people have had their faith in Labour badly shaken and they are not going to return to the fold any time soon.


Stephen B said...

"Borrowing should be reined in..."

Just out of interest, given that a government borrows to spend where do you think spending should be cut (public sector efficiency measures shouldn't form part of your answer - they never happen despite what governments promise)?

Labour have managed to get themselves into the classic situation of trying to avoid the Scylla of a worsening economy and the Charybidis of political unpopularity. Dealing with one only makes the other worse.

Actually, the next election might be a 'good one for them to lose.'

Bernard Salmon said...

ID cards would be a good start. And on a personal level I'd also cut back on Trident.

Stephen B said...

'Soft on terror and weak in the world' will be how you would be received for promoting that within the UK - illustrating the point that there are never prizes for suggesting cuts (as the infamous lib dem campaigning strategy handbook recognizes!).

Anonymous said...

It wasnt about helping the lowest paid, it was about buying as many votes as possible. All labour are concerned about is saving their own necks including Frank Field it seems.

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