Wednesday, November 19, 2008

Tax cuts, then tax rises: an electoral scenario

David Cameron is right:

Gordon Brown knows that borrowing [to fund tax cuts] today means higher taxes tomorrow.

But he’s also wrong:

Everyone knows the prime minister is planning a Christmas tax giveaway, but tax cuts should be for life, not just for Christmas.

The thing about an anti-recession fiscal stimulus is that it can perfectly well be temporary. Then, when decent growth resumes, you can tighten the reins again.

So tax cuts now, presumably targeted at lower earners (and/or rises in tax credits) will need to be reversed later, right?

Wrong. Some fiscal tightening or other will be needed later on – but not necessarily in the same place. And this means there’s no reason for Brown to go into an election trying to claim that no tax rises are on the way.

Imagine this:

In a pre-election Budget, Alistair Darling declares that now the economy is recovering, it’s possible (and desirable) to cut back on borrowing. So he announces a new income tax band for very high earners.

But wait! Labour promised at the last election not to raise the top rate of tax! Surely a move such as this would ruin the Government?

No. I didn’t say they implement the higher tax rate, just that they announce it. The tax change could be set to come in the following year. So voters will still have their chance to accept or reject it as they like.

The package could be sweetened a little by adding to it a small cut in the basic rate of income tax, on the grounds that while the recession is past, many ‘hard-working families’ are still feeling the pinch and deserve some extra help. This will take up some of the money raised by the new top rate, but still allow most of it to go on reducing debt.

The Budget is passed; the election is called. How do the Tories fight this?

First of all, they’d have to take the side of the super-rich versus the vast majority in terms of who’d gain and lose. And secondly, as the policy would be enshrined in legislation (even if time-delayed), it would in effect be the status quo – undoing that always provokes more howls from the losers than proposing different future plans from the other lot. How do they fight it?

I wonder. Could Labour’s electoral chances really be helped by plans for higher income tax on top earners? It goes against new Labour’s founding principles. But these are very different times. Will the post-recession middle class feel more aspirational (against tax rises for the rich in the hope of becoming rich themselves) or consolidatory (supporting whatever will help their finances now)?

Whichever party can best adapt to the new climate will do well.


Anonymous said...

Oh come on. The Tories would fight that easily - they'd claim Labour lied about raising tax. They'd claim the tax raises hurt hard working families. Whether or not these claims are true or not is irrelevant if the Tories spin everything correctly, because the most widely read sections of the media aren't the Guardian. With Dacre and Murdoch in his pocket Cameron can match Labour blow for blow.

Tom Freeman said...

Thing is, though, if the Tories keep spinning that 'Labour will have to put taxes up', they'll trap themselves with the need for higher taxes too. And the question will then become: which taxes?