The first days of the year have seen three tax rises which are all regressive: in fuel duty, insurance premium tax and, most significant, VAT.
The Chancellor tied himself in knots yesterday trying to defend the VAT rise as a “progressive” measure – contradicting his leader David Cameron who has warned that it is “very regressive, it hits the poor hardest”. The mixed messages from the two most senior Tory members of the Government brought predictable accusations from the Labour leader Ed Miliband that they were treating the public “like fools”.
The Chancellor also returned home from Klosters to find his face plastered across attack adverts in national newspapers, casting him as “the Artful Dodger”, and focusing on Mr Osborne’s considerable independent means. The ads were funded by a relatively new pressure group, 38 Degrees.
The VAT increase is the first instalment in what amounts to the largest peace time tax hike in British history.
Those at the bottom of the pile face cuts in housing benefit, disability living allowance, council tax benefit and other welfare payment s over the next year or two. But the pain will also be felt across so-called “middle England”. In April workers will face higher national insurance contributions – an extra 1 per cent taken from their wages for most, a rise in income tax in all but name.
The Government will also deliver a much-needed boost to Lib Dem morale, and the party’s progressive credentials, with the starting threshold for income tax raised by £1,000 to about £7,500.
Then again, the Chancellor will make middle England – broadly defined – pay dearly for this, as the basic and higher rate tax thresholds will be reduced to compensate, on top of the NI rise: an additional 700,000 people will be dragged into the 40 per cent tax band.
Factor in changes to tax credits and benefits, especially child benefit, and the independent Institute for Fiscal Studies believes that the changes will cost average families – those who earn £23,000 a year after tax – about £500 a year by 2012. For those households with teenagers receiving the educational maintenance allowance, abolished this year, the effect will be still greater. By the time the Bank of England raises base rates by the end of the year, as many predict, and adds another £40 a month to typical mortgage bills, the middle classes’ misery will be complete.
On fairness, the IFS verdict is a damning one; by 2012, apart from the richest 10 per cent of the population, the tax and benefit changes will cost the poorest tenth of the nation twice what it will cost those close to the top of the tree, as a proportion of their incomes.
Soon will come an even stronger test. Pay rises are lagging far behind inflation. On the Bank of England’s estimates, price rises will approach 4 per cent this spring, and could be much higher. Typical pay awards are running at only 2.2 per cent, and will be nil for public sector staff on more than £21,000, for two years. But things are very different for those bankers lucky enough to be share in the £7bn bonanza about to be enjoyed in the City.
The inability of Mr Osborne and, more poignantly, the Business Secretary Vince Cable, to restrain the bankers will soon be seen as a sign that both coalition parties have slid “off piste”. The personal assaults on the Chancellor have already stepped up, and worse will surely follow.
For those in the public sector losing their livelihoods – 330,000 over the next few years – the decline in their living standards may be devastating, and for older redundant staff it could prove permanent. So the claim that the Government’s polices are “fair” or “progressive” will be under the most intense strain.
Apart from fairness, there is also the test of whether the Chancellor’s strategy will work on its own terms – fixing the public finances. So far the evidence is mixed, as with the economy as a whole.
Growth has been faster than anticipated, but the cuts and tax hikes are yet to bite in earnest, and tax revenues are weak. The deficit in November was the worst ever. Much will depend on what happens to unemployment; if it rises much faster than the Treasury and the independent Office for Budget Responsibility forecast, and if the private sector is unable to generate well-paid jobs to replace those lost in the public sector, then the dole queues will be longer, the benefits bill higher, the tax take lower and the budget deficit stubbornly high.
That would leave Mr Osborne facing an unpalatable choice. He could let the deficit balloon, allowing what the economists call the “automatic stabilisers” to help boost the economy. (At which point he would have to admit “failure”.) Or he could add another twist to the screw in the Budget or autumn statement and raise taxes and cut spending even more. That might plunge the economy into an even deeper crisis, Ireland-style.
By this time next year Mr Osborne could replace Nick Clegg as the most hated man in Britain, a fate the Chancellor contemplates with equanimity. Quite something for a man of 40.
Tax accounts: Word on the street about VAT rise
Yesterday VAT went up from 17.5 to 20 per cent, the first time the Government's austerity measures will have affected many Britons. Here, shoppers in central London give their thoughts.
Tony Smith, 49, a postman from Kent
"This is a typically cynical Tory move. It is clearly going to make people spend less and will have a knock-on effect on the economy. Osborne should raise the threshold of tax for people who can afford four-week holidays, not target people like me, a normal postman, who is struggling to survive. He is completely out of touch with working people."
Steve Vermin, 40, a teacher from Stratford, east London
"The Conservatives said, 'We are in this together' and we are not at all. When there are people like Sir Philip Green who get out of paying millions of pounds of tax through legal loopholes, it is criminal to increase prices for those living on a fine margin of survival."
Michelle Morgan, 24, a nurse from Blackpool
"I haven't noticed increased prices as yet, just less people out today. It is definitely going to affect the way I spend though. I wanted to buy a TV and other household appliances this year, but now I don't think I will."
Paykar Sediqi, 31, a manager at a souvenir shop on Oxford Street
"Prices are going to go up for everything and small companies, like ours, are going to have to increase our prices. There is no one in the shop today and those who come in are spending £10, not £200. I think Osborne could have done things differently and not have put the pressure on us."
Rute Pereira, 23, childcare student at Hackney College, east London
"It's horrible. As students we don't get that much and I am trying to save up to pay back my loan. I can't even get new clothes and I know increased prices are going to affect me big time. What I could get last year I am not going to be able to get now, especially with the increased cost of travel."
Schlomi Rohach, 23, a food store manager from Edgware
"It is not going to be easy. We are already looking into cheaper lines to sell and we are going to have to drop some of our quality goods and go with more disposable ones. We will have to mark up our prices, but despite all the taxes increasing, nothing is getting better in society."
Interviews by Sarah Morrison
Comments