Inside Westminster: Osborne has set Labour a 2015 tax trap

The Chancellor plans an extreme course of spending cuts to reduce the deficit

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George Osborne has developed a “phobia”, according to Cabinet colleagues.  “He will not talk about any tax rises; it is a total no-go area,” one explained.

It wasn’t always so.  The Chancellor’s deficit-reduction strategy is currently based on filling 80 per cent of the nation’s financial hole through spending cuts, with 20 per cent met by tax increases.  Mr Osborne was prepared to back the Liberal Democrats’ plans for higher taxes on expensive homes. It was David Cameron who blocked them.

In an important speech this week, setting out the terms of trade for next year’s general election, the Chancellor promised £25bn of cuts in the 2015-17 period to finish the job on the deficit. But there was no mention of tax rises.  His strategy for the next five-year parliament is to rely on 100 per cent cuts and zero per cent tax rises.

Fellow ministers speculate that Mr Osborne has been permanently scarred by his personal nadir –the “omnishambles Budget” of 2012, after which he had to reverse a series of hasty tax raids on grannies, pasties, churches, caravans and charities.

But there is another reason for his phobia.  His speech marked a change of gear in which the Conservatives will throw the kitchen sink at Labour.  His £25bn of cuts, with £12bn coming from welfare, is a trap for Ed Miliband and Ed Balls. If they match the cuts, the Chancellor will challenge them to spell out where the axe would fall. If they refuse to match them, he will warn that a Labour Government would increase borrowing and taxes.  The Tories are desperate to re-run their favourite election campaign – the  “Labour tax bombshell” they launched in 1992, the last time they won a majority.

“It’s crude and brutal, but it’s our best shot,” one Tory Cabinet minister admitted. “From now on, it’s all about Labour.” Indeed, Mr Osborne’s  speech suggested that he thinks the Tories’ trump card is…..well, the Labour Party.

The Chancellor even appears to encourage talk of eventual tax cuts, a growing demand by Conservative MPs and Tory-supporting newspapers as they seek a “reward” for the public for the years of austerity. Recently, Mr Cameron spoke of his aspiration to reduce the top tax rate from 45p to 40p on annual income over £150,000,  which would go down like a lead balloon with the vast majority of voters.  He corrected his message in a TV interview last weekend, in which he also rebuffed Tory calls for tax cuts for people who have been dragged into the 40p rate.  He made clear his priority would be to help those at the bottom end of the earnings ladder.  Talking up tax cuts doesn’t add up  when the annual deficit is still £111bn; it jars with Mr Osborne’s accurate assertion that more spending cuts are needed. 

The Chancellor will try to lock in the new round of cuts through a “charter for fiscal responsibility” to be voted on in Parliament and a bringing in a ceiling on welfare spending.  Two more traps for Labour, of course. But there is no need to impose such a straitjacket and the next government, even  a majority Conservative one, might need to show the same flexibility Mr Osborne displayed when he delayed the date for clearing the deficit from 2015 to 2018.

Nick Clegg was quick to distance the Liberal Democrats from the Osborne approach and was honest enough to support some extra tax rises on the wealthy.  He said the vast majority of economists agreed on such a mix between spending cuts and tax increases.  He argued that the Conservatives were now “out on an ideological limb” in saying they would ask the less well off  to make further sacrifices while sparing the wealthy.

His attack on this “lop-sided, unbalanced approach” was a reminder that the Lib Dems have much more in common with Labour  than the Tories,  something that will become increasingly apparent as the election looms and the two coalition parties diverge. Both the Lib Dems and Labour would probably support a mix of  about 75 per cent cuts and 25 per cent tax rises to clear the remaining deficit. 

How will Labour tiptoe through the minefield planted by Mr Osborne?  It will not be pushed into declaring its tax and spending plans until much nearer the election. But we will learn more about the party’s approach in the next two weeks.

A flurry of speeches by the “two Eds” and Shadow Cabinet members will link short-term measures, like the proposed energy price freeze, to alleviate the “cost of living crisis” with long-term reforms to transform  the economy to correct the flaws which caused living standards to fall. Mr Miliband intends to portray the choice between “more of the same” from the Tories and real change under Labour.

In return, Mr Osborne will argue that the change offered by Labour would carry a high risk and a high price. He calculates that the public might, on balance, prefer more of the same.

The Chancellor’s £25bn of cuts could prove undeliverable. It would be more honest to fill some of the hole in the nation’s coffers through tax rises for  those who could afford them. It would also be much fairer than lopping another £12bn off welfare.

A new, friendly politics?

What should we make of the unexpected love-in between Ed Balls and Nick Clegg? Only two weeks after the Deputy Prime Minister named Mr Balls as the only politician with whom he had a personal feud, up popped the normally combative shadow Chancellor to say he had just had a “very friendly and warm chat” with his friend Nick and understood why the Liberal Democrats had gone into coalition with the Tories in 2010.

This was off message. The official Labour line is that the Coalition was a “monumental mistake.” Labour has to say that because being too nice to Mr Clegg would give permission to the Lib Dem 2010 supporters who have switched to Labour to return to the Lib Dem fold.  That could wipe out Labour’s opinion poll lead. Oops.

I suspect Mr Balls was reflecting a new, gentler approach by Labour.  Over the Christmas break, Team Miliband concluded that the “yaboo politics” of Westminster is one reason why so many people have tuned out.  Mr Miliband adopted a more constructive approach at Prime Minister’s Questions this week and will do so again.

I’m not sure it will last. I recall another Opposition Leader promising to end “Punch and Judy politics” - David Cameron

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