Larry Elliott writes:
Imagine that Ed Miliband had remembered to talk about the
deficit in his conference speech.
Imagine also that the Labour leader had said that despite the country being in the red by close to £100bn he was planning to boost spending on health and education by £7bn a year.
The reaction from the Conservative party and its media supporters would have been swift and brutal.
Profligate. The economics of the madhouse. Alice in Wonderland financial management. And lots more.
So what’s the difference when David Cameron stands up and says he plans tax cuts of the same order of magnitude during the course of the next parliament?
The prime minister gets a standing ovation and some short-term popularity at the expense of a longer-term problem.
Or, rather, three longer-term problems.
Problem number one is how the tax cuts are going to be paid for.
There are economists who see the sense in cutting taxes or raising spending even when deficits are high, because they think the immediate hit to the public finances is more than outweighed by the extra growth that is eventually generated.
Neither George Osborne nor Cameron belongs to this school, however. They have insisted repeatedly over the past five years that there can be no tax cuts until the deficit is sorted.
The chancellor said earlier this week that he was looking for spending cuts of £25bn in the first two years of the next parliament. Cameron’s giveaway means that figure has now risen to more than £30bn.
There is no more low-hanging fruit to be picked, which is why Britain’s leading experts on the public finances at the Institute for Fiscal Studies were already dubious about whether Osborne’s original deficit reduction targets could be achieved without tax increases.
Most government departments will have seen their spending cut by a third between 2010 and 2018, Paul Johnson, the IFS director said, and that’s without taking into account the PM’s new tax pledges.
The upshot, he suspects, will be even deeper departmental spending cuts or stealth taxes to pay for Cameron’s commitments.
Cameron’s second problem is that the tax cuts do far more to help the better off than they do those on the lowest incomes.
This was probably intentional, since the politics of Cameron’s tax announcement were about defending his flank against the charge that the Conservatives don’t care about the poor while at the same time targeting those in Middle England whose votes will be crucial next May.
The prime minister is well aware that the number of people paying income tax at 40% will have increased by 2 million during the course of this parliament.
That has been due to one of Osborne’s hidden tax increases: freezing the threshold at which people move into the 40% band rather than increasing it in line with inflation.
By 2020, the 40% threshold will be just above £50,000 according to Cameron’s proposal, which is where it would have been had it been linked to the cost of living throughout.
Raising the personal allowance to £12,500 does nothing for the increasingly large army of people who don’t earn enough to pay income tax.
The budget deficit has been higher in the first five months of the current financial year than in the same period of 2013-14 because the economy is proving exceptionally good at creating low-paid jobs.
But for those higher up the income scale, the tax cuts do make a difference. Indeed, the more you earn the more you benefit.
Both the IFS and the Joseph Rowntree Foundation made the point that targeting help on those on the lowest incomes would require more generous tax credits or an economy capable of generating more jobs that are secure and well paid.
According to the IFS, basic rate (20%) taxpayers would be £160 a year better off as a result of the increase in the personal allowance. Those in the 40% tax bracket benefit by £430 a year.
Comparisons showing that basic rate taxpayers would be £500 better off as a result of Cameron’s pledge are misleading.
They do not take into account the raising of the personal allowance to £10,500 next April and further increases over the following five years to keep pace with inflation.
By 2020 the personal allowance would be £11,620 if uprated to take account of the increase in the cost of living.
Cameron’s final problem is that the government is now sending out mixed messages.
A country that was flat broke on Monday when Osborne spoke can by Wednesday find the dosh for £7bn of spending cuts.
By playing fast and loose with the public finances, the prime minister has made it harder to attack Labour as the party whose numbers do not stack up.
Imagine also that the Labour leader had said that despite the country being in the red by close to £100bn he was planning to boost spending on health and education by £7bn a year.
The reaction from the Conservative party and its media supporters would have been swift and brutal.
Profligate. The economics of the madhouse. Alice in Wonderland financial management. And lots more.
So what’s the difference when David Cameron stands up and says he plans tax cuts of the same order of magnitude during the course of the next parliament?
The prime minister gets a standing ovation and some short-term popularity at the expense of a longer-term problem.
Or, rather, three longer-term problems.
Problem number one is how the tax cuts are going to be paid for.
There are economists who see the sense in cutting taxes or raising spending even when deficits are high, because they think the immediate hit to the public finances is more than outweighed by the extra growth that is eventually generated.
Neither George Osborne nor Cameron belongs to this school, however. They have insisted repeatedly over the past five years that there can be no tax cuts until the deficit is sorted.
The chancellor said earlier this week that he was looking for spending cuts of £25bn in the first two years of the next parliament. Cameron’s giveaway means that figure has now risen to more than £30bn.
There is no more low-hanging fruit to be picked, which is why Britain’s leading experts on the public finances at the Institute for Fiscal Studies were already dubious about whether Osborne’s original deficit reduction targets could be achieved without tax increases.
Most government departments will have seen their spending cut by a third between 2010 and 2018, Paul Johnson, the IFS director said, and that’s without taking into account the PM’s new tax pledges.
The upshot, he suspects, will be even deeper departmental spending cuts or stealth taxes to pay for Cameron’s commitments.
Cameron’s second problem is that the tax cuts do far more to help the better off than they do those on the lowest incomes.
This was probably intentional, since the politics of Cameron’s tax announcement were about defending his flank against the charge that the Conservatives don’t care about the poor while at the same time targeting those in Middle England whose votes will be crucial next May.
The prime minister is well aware that the number of people paying income tax at 40% will have increased by 2 million during the course of this parliament.
That has been due to one of Osborne’s hidden tax increases: freezing the threshold at which people move into the 40% band rather than increasing it in line with inflation.
By 2020, the 40% threshold will be just above £50,000 according to Cameron’s proposal, which is where it would have been had it been linked to the cost of living throughout.
Raising the personal allowance to £12,500 does nothing for the increasingly large army of people who don’t earn enough to pay income tax.
The budget deficit has been higher in the first five months of the current financial year than in the same period of 2013-14 because the economy is proving exceptionally good at creating low-paid jobs.
But for those higher up the income scale, the tax cuts do make a difference. Indeed, the more you earn the more you benefit.
Both the IFS and the Joseph Rowntree Foundation made the point that targeting help on those on the lowest incomes would require more generous tax credits or an economy capable of generating more jobs that are secure and well paid.
According to the IFS, basic rate (20%) taxpayers would be £160 a year better off as a result of the increase in the personal allowance. Those in the 40% tax bracket benefit by £430 a year.
Comparisons showing that basic rate taxpayers would be £500 better off as a result of Cameron’s pledge are misleading.
They do not take into account the raising of the personal allowance to £10,500 next April and further increases over the following five years to keep pace with inflation.
By 2020 the personal allowance would be £11,620 if uprated to take account of the increase in the cost of living.
Cameron’s final problem is that the government is now sending out mixed messages.
A country that was flat broke on Monday when Osborne spoke can by Wednesday find the dosh for £7bn of spending cuts.
By playing fast and loose with the public finances, the prime minister has made it harder to attack Labour as the party whose numbers do not stack up.
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