Last updated: March 21, 2012 8:03 pm

A roll of the dice on the top rate of tax

The measures were all about coalition dynamics
George Osborne delivers UK Budget 2012

Budget speeches are like firework displays. They light up the sky for a few moments before slipping from view. Two of the measures in George Osborne’s package, however, may continue to burn brightly in the gloom of austerity: the cut in the top rate of income tax and a tax increase on the incomes of the retired. The chancellor must hope it is otherwise.

Mr Osborne produced a Budget all about politics. More than that, it was about politics within politics. It was framed by the dynamics of the coalition, and by the chancellor’s desire to keep faith with the Tory right. It confirmed his ambitions to establish himself as David Cameron’s heir apparent. Oh, and one more thing: the Budget was a political gamble the coalition may soon regret.

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Philip Stephens

As far as the economy is concerned nothing has changed. Useful though some of the supply-side measures may prove (some such as road leasing, are frankly barmy), Mr Osborne did not persuade the Office for Budget Responsibility to change its view of the economic outlook. Britain may avoid a second recession, but don’t expect much in the way of growth. As for public services, the chancellor promised austerity for as far as the eye can see, including another £10bn of welfare cuts. He has set his fiscal course and doesn’t intend to budge from it. The reality for most voters over the year to the next Budget is that, at very best, living standards will stand still.

No one could accuse Mr Osborne of playing it safe when it came to the politics. He talked about a budget to put Britain back to work, but the measure that will stick in the public consciousness was the cut from 50 to 45 per cent in the top rate of tax. On Mr Osborne’s part, the decision marked a self-conscious tilt to the right – one he hopes will strengthen his personal constituency on his party’s Thatcherite wing.

Mr Cameron was lukewarm about this particular budget measure. Left to his own devices he would have deferred a decision. The prime minister, though, seems to take an old-fashioned view that the final word on such matters should be left to the chancellor. For all that, it was striking how visibly pleased Mr Cameron seemed when Mr Osborne told the House of Commons that the Treasury would raise five times more from other taxes on the rich than it would lose from the top-rate cut.

Nick Clegg took a lot of persuading during the pre-Budget wrangling between the coalition partners. He rejected the chancellor’s opening gambit – that the rate should be brought down to 40 per cent this year. Ultimately, the Lib Dem leader accepted the 45 per cent rate as a quid pro quo for the very sharp increase in tax allowances at the bottom. Mr Clegg’s allies insisted that these tax cuts for low- and middle-income earners were worth more than 30 times the top rate cut.

That is as may be, but political symbolism often trumps arithmetic. Gordon Brown discovered this at great political cost when, as Labour chancellor, he abolished the 10 per cent starting rate of income tax. As for Mr Osborne’s increase in thresholds, they are too complicated for many voters to understand.

The post-budget charge that Mr Cameron and Mr Osborne worry about is that they are rewarding their wealthy friends while loading the burden of austerity on to everyone else. Mr Clegg’s big fear is that the Lib Dems will be accused of collusion in a blatant unfairness.

The government’s decision to freeze tax allowances for pensioners – a measure that will raise several billions in coming years – has been added by Labour to the list of charges. The retired have thus far escaped the worst of Mr Osborne’s austerity, but this will not earn him any credit with those facing higher taxes. The elderly are a powerful interest group. They tend to vote.

Mr Osborne says the top-rate cut is important to send a signal that Britain is “open for business”. His cuts in corporation tax were calculated to reinforce the message. Perhaps the chancellor will get away with it. Ed Miliband scored some points in his Commons riposte to the budget. Many Conservative MPs will be discomfited by the Labour charge that the government is increasing the burden on middle-income pensioners to hand it over to bankers. Yet for all that the economy often seems to offer Labour an open goal, the opposition is still struggling to articulate a credible alternative strategy.

This most political of budgets was by any definition an audacious throw of the dice. When Whitehall insiders describe decisions as “brave”, what they really mean is “dangerous”. Little wonder Mr Clegg’s party, already languishing in the polls, has been fast to distance itself from the top-rate cut. The Lib Dems have been blamed before for giving cover to unpopular Tory policies. This time it could prove disastrous.

philip.stephens@ft.com

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