Is George Osborne planning to scrap the 50p income tax rate? Yes.
But not today, nor tomorrow. Not this month, or next. Not even before Christmas. The move may not even take place next year.
The rate – which applies to those earning £150,000 – has always been classified as “temporary” by the coalition.
In recent weeks the Tories and Lib Dems have played up their differences over the issue. In fact neither think the 50p rate should be removed just now; the internal debate is whether to go for 2012 or 2013.
Danny Alexander insisted last Sunday that scrapping the rate was not a priority – and that lifting the income tax threshold to £10,000 should come first. Tory outriders such as Boris Johnson and Lord Lamont called for it to be axed; but even Lamont said this should happen in 2013. Johnson, meanwhile, is unfettered by the responsibilities of national coalition government.
My working assumption was until recently that Osborne would announce the removal of the rate in the April 2012 Budget – but that he might say it would not take place for six months or a year.
(By January he expects to have HMRC’s report on whether the tax haul from the 50p rate is much lower than Alistair Darling first hoped, due to tax avoidance.)
The problem for the coalition is that fiscal and political conditions in eight months’ time may still not be appropriate.
Politically the move sends out a message that “we’re all in this together – apart from the rich”: that wins few votes for as long as everyone else is feeling the cuts.
(In happier economic times, you could argue, it sends out a welcome message about not hurting aspiration and incentivising entrepreneurs.)
In fiscal terms, this may not seen like a big giveaway, but even cutting the rate from 50p to 45p could cost the exchequer around £750m. Appeasing the Lib Dems by lifting the income tax threshold would be equally expensive. Both measures add red ink to the national balance sheet.
In other words, the economy (and the deficit) needs to be moving in the right direction for the Treasury to go ahead. As I wrote on Monday:
Many Lib Dems would accept the move in two years’ time, so long as it is against the backdrop of stronger economic growth and accompanied by a higher income tax threshold.
This week has brought several unwelcome reminders that this essential recovery is not guaranteed; weak GDP figures, poor manufacturing data and the stock market slide. (Although there was some positive service sector data). With Lloyds Banking Group shares at half their price at the time of part-nationalisation, the sell-off of the government’s stakes in the banks looks as far away as ever*.
On Thursday Robert Chote sounded one positive note in an otherwise gloomy interview in the Independent; the head of the OBR suggested that though economic growth was likely to undershoot, that wasn’t necessarily the case with tax revenues – because of inflation. That point could still give heart to the fiscal optimists.
But who now thinks that the economy will be roaring ahead early in 2012?
You don’t have to be a Cassandra to wonder whether Osborne’s dilemma next spring may turn out to be not where to cut taxes; but where to raise them.
(I say this in the spirit of Devil’s Advocate, not economic guru).
* (The government’s fiscal framework does not take the bank sales for granted, so the proceeds will at some point provide the cash for a generous giveaway. But their privatisation won’t happen until the share prices are not just back at the level of the rescue – but at a premium.)
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