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The sting. How George Osborne is tackling the deficit

January 31st, 2016

We’re all in this together, so David Cameron told us before the 2010 general election.  This assertion was received with derision by many outside the Eton-attending classes.  And sure enough, when the coalition came to power after the election, the impact of the deficit-reduction measures was felt most keenly by those at the bottom of society.  The Treasury explicitly targeted spending cuts over tax rises in the proportion of 80:20.  With most government spending being deployed on the poorest in society, the direct impact of this approach was regressive.  Organisations like the IFS were quick to point this out at successive budgets, much to the government’s discomfiture.

The treatment of the richest in society was a regular source of friction within the government in the last Parliament, and not just between the coalition parties.  When the top rate of tax was reduced from 50% to 45%, rumour had it that George Osborne wanted to reduce it to 40% and introduce a mansion tax but that this was vetoed by David Cameron.

Nearly six years on from the Conservatives taking over the reins of power and the deficit still yawns wide.  The Conservatives committed at the last election to reducing spending by a further £12 billion.  Labour failed to force the Conservatives to spell out just how they were planning to achieve this.  When the Conservatives moved from the abstract to the concrete, their own backbenchers disowned the idea of scrapping tax credits, forcing George Osborne to retreat.

The hole created by abandoning the tax credit cuts is smaller than might be imagined since the system of tax credits is due to be replaced by universal credit in the next couple of years (it remains to be seen whether that actually happens). Still, the Chancellor has needed to seek new ways of balancing the books.  And he is confronted by a numerical problem.  A handful of unhappy Conservative MPs combined with a unified opposition can scupper controversial plans. Sometimes the fact that government’s majority is just 12 really matters.

How to solve this problem?  In his ideal world, no doubt, George Osborne would ensure that Conservative MPs were as effectively programmed as the SNP intake.  In the real world, there are too many populist backbenchers of all shades of opinion in the party, stretching from Heidi Allen to David Davis, to make it safe for him to rely on their unstinting support.  Each will have their own hobby horses.  All those hobby horses will need to be accommodated.  With the Lib Dems much reduced in number and having moved from government to opposition, it is paradoxically harder for a pure Conservative government with a small majority to impose spending cuts than for the previous Conservative/Lib Dem coalition with a much larger majority.  So much for the moderating influence of the Lib Dems.

If the Chancellor cannot reduce spending easily, he will need to look again at tax rises.  Those may not be particularly popular within his party but if appropriately targeted may not be opposed by the opposition parties.   So the Chancellor needs to find targets for tax rises who are acceptable to the opposition parties and where the impact on tax take will be positive, at least in the short to medium term.

The inexorable logic of the need to close the deficit, the government’s small majority, its unreliable backbenchers, the need to obtain the acquiescence of some opposition MPs and the need to raise substantial revenue is that George Osborne needs to increase the tax on richer members of society (who in any case have the most money to be relieved of).  And that is exactly where he has been focusing.

Over the last few years there has been much focus on the top 1% and their share of wealth (and support of the tax bill).  30% of all income tax receipts come from this group.  Many right-leaning commentators have expressed the view that this group are highly mobile and tax rises on them would prove counterproductive.

The Chancellor, it seems, partially disagrees.  He is less concerned about the top 1% and more concerned about keeping the top 0.1% happy.  The top 0.1% of income taxpayers – just 30,000 individuals – pay 14% of all income tax receipts.  The country’s tax base is very dependent on a very few very wealthy individuals.  I’ll call these the super-rich.

The Chancellor is largely leaving this group alone to focus on the next 0.9% or so.  This group is still well-upholstered but nowhere near as mobile as that uppermost group.  If you’re a partner in the Birmingham office of an accountancy firm or a managing director of a company in the south east of England, opportunities to emigrate will not come along on a daily basis.  Some will be able to consider their options but most will just have to lump it.  I’ll call this next 0.9% the affluent.

So how has the Chancellor gone after the affluent?  The super-rich benefit especially from the low top rate of income tax.  By tackling the reliefs which are enjoyed particularly by the affluent rather than the super-rich, he stings them most.

Look at how he has changed the taxation of non-doms.  By upping the minimum tax take from non-doms, he has forced all bar the highest paid onto the UK tax system in full.  The super-rich will have sighed at seeing the minimum increase but for so long as their non-dom status puts them at an advantage over taking British domicile, they probably won’t be better off decamping elsewhere either (or anywhere that isn’t social death to be seen living in, anyway).

The annual allowance for pension contributions has been reduced in successive budgets.  In 2010/11, the annual allowance for pensions was £255,000.  Next year for those on over £210,000 a year, it will be £10,000, with fresh horrors awaiting the affluent in the budget, no doubt.

Buy-to-let mortgages are no longer tax-deductible and stamp duty for those buying second homes and for buy-to-letters is now to be set at a much higher rate (but not for companies with more than 15 properties).  It’s the super-rich wot gets the gravy it’s the affluent wot gets the blame.

No one will weep for the affluent.  They earn more than most journalists so they don’t even benefit from the shameless special pleading that you often see in newspaper columns.  There is, however, a catch.  For a rising number of people, paying tax is something that other people do.  There must be a limit to how much can be expected of a relatively small number of cash cows before the affluent are milked to death.  With a continuing need to close the deficit, we look set to explore this further in the coming years.

We can’t go on like this, so David Cameron told us before the 2010 general election.  But for those in the sights of the Chancellor, they may not have an option.

Alastair Meeks