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Forget this Budget: it's last year's that counts

A cut in the top rate of income tax was a terrible mistake, and the damage is done

Prepare for D-Day: Disaster Day for the coalition. Not tomorrow, when the Commons vote on press freedom will divide Conservative MPs from their Liberal Democrat partners. D-Day arrives in 20 days' time, on 6 April, when the top rate of income tax is cut from 50p in the pound to 45p.

This time last year, I wondered what on earth George Osborne thought he was doing, and wrote that the announcement, in last year's Budget, had probably made the difference between the Conservatives winning and not winning the next election. Nothing has persuaded me since then that this was an exaggeration. For 12 months, the Labour lead in the opinion polls has been solid, and David Cameron has been unable to gain a hearing for his centrist message.

The Prime Minister remains the pre-eminent politician in his party and beyond, even if I did make the case for Theresa May last week. It is telling that our ComRes opinion poll today finds that only 28 per cent agree that "the Conservative Party would have a better chance of winning the next election if it replaced David Cameron as leader", while 38 per cent disagree.

He has a good sense of the tempo and tactics of politics. His promise of a referendum on Europe was a judo moment, pre-empting the inevitable, and done well. Some big pro-Europeans of the Blair government praise his speech highly.

Last week, he caught Ed Miliband and Nick Clegg off balance by pulling out of talks about how to put Lord Justice Leveson's proposals into practice, and calling tomorrow's vote. I suspect that Cameron, convinced that the Labour leader would use the difference between them to pull out of the talks and denounce him, went for his gun first. The Prime Minister was in a tight corner and has played himself out of it with some skill. If he loses tomorrow's vote, he impresses the defenders of free speech (who happen to include some newspaper owners) and many of his own backbenchers (for standing up to the Liberal Democrats). If he wins, he is in a stronger position to face down his opponents in the Lords who want tougher press regulation.

He handles these moments well, albeit at the expense of a consistent message on the core economic theme of aspiration, to which he tried to return ("the aspiration nation") in yesterday's speech to the Tory spring conference.

Everything that he does well or cleverly is drowned out by a simple story of nasty rich Tories looking after their own and being horrid to ordinary people. That was why Cameron retreated on minimum alcohol pricing last week. It was reported as if it were the result of the Home Secretary's leadership bid, because May is one of the ministers in the Cabinet known to be opposed to it. But Cameron's decision was nothing to do with fending off a leadership challenge, and everything to do with not wanting to be seen as bent on denying the low paid their cut-price pleasures.

Ed Miliband's response showed how deadly he can be at small-p politics. His opening question in the Commons on Wednesday – "Is there anything the Prime Minister could organise in a brewery?"– was so effective that Cameron never recovered. I am not sure it was suggested by Alastair Campbell, but it was good enough to have been. Before Cameron could get on to his lines about rewarding hard work and responsibility, he was asked by a Labour backbencher if he would benefit personally from "the millionaires' tax cut". He replied awkwardly: "I will pay all of the taxes that I am meant to."

So why cut the top rate? A year after the decision was made by the Quad of Cameron, Osborne, Nick Clegg and Danny Alexander, we are hardly the wiser. Osborne, in particular, believes that the 50p rate suppresses enterprise and repels foreign entrepreneurs. He believes it so strongly that he discounted the extent to which it would allow the Tories to be painted as hostile to the interests of ordinary working people.

We have learnt since that Cameron and Clegg made common cause at the last moment to prevent Osborne cutting the top rate from 50p to 40p. This allows them to say that the top rate will still be higher than it was under Labour, and is important because Cameron and Osborne are usually united. I am told, incidentally, that the ideological alignment of the Quad is unexpected, with Cameron and Osborne often in the centre mediating between Alexander on the right and Clegg on the left.

All we know is the cut in the top rate of income tax was a terrible mistake, and although Osborne may try to raise other taxes on the better-off in the Budget this week – we can't rule out a clever wheeze to make the best of the revenue-neutral occasion – the damage is done. The Tories could still pull back, through persistent discipline and a relentless focus on the choice between Cameron and Miliband. But with two years to go, they are close to being in the position where they need what Damian McBride, Gordon Brown's former spin-doctor, calls a Massive External Event to have a chance at the next election.

This week's Budget probably doesn't matter. Last year's Budget matters more than ever.

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