Even when there is no money to spend, politicians find ways to offer us tax cuts, one of the most potent weapons in their game. Ed Miliband’s unexpected plan to bring back a 10p starting rate of tax, funded by a mansion tax on homes worth £2m, was clever politics and has changed the terms of trade.
His gambit worked on several levels. It will be a good, simple “doorstep message” at the 2015 election. It associates Labour with a tax cut rather than a tax or spending rise – useful when many voters still blame the previous government for the mess we are in. It shows that Labour can admit mistakes. The party should have done more of that soon after the 2010 election, but better late than never. It distances Mr Miliband and Ed Balls from Gordon Brown, perhaps persuading some voters to give One Nation Labour a look.
Mr Miliband’s move got under the Conservatives’ skin. They are the instinctive tax-cutters, and regard Labour as imposters. It should remind them not to underestimate the Labour leader. He may go into hibernation for too long, but when he pops up he packs a surprisingly good punch.
His tax cut has limited George Osborne’s options in next month’s Budget, just when the Chancellor’s mind was turning to how to tackle the crisis in living standards and find a Conservative offer to the low paid. Although the Coalition is taking two million people out of tax by raising thresholds, this is a Liberal Democrat policy and it may be hard for the Tories to get much credit.
Tory calls for a 10p rate have been rapidly gaining ground. It will be harder for Mr Osborne to do it now. Tories like cutting tax rates, which are more visible to voters than raising thresholds. As Nigel Lawson, their former Chancellor, once put it: “I wished to create a large constituency in favour of income-tax reductions. The last thing I wanted to do was to reduce the size of that constituency by taking people out of tax altogether.”
Labour’s tax cut at the bottom heightens the contrast between the two main parties because of Mr Osborne’s unwise decision to cut the tax on incomes over £150,000 from 50p to 45p in April. Sensible Tories are nervous, fearing it will reinforce their image as “the party of the rich”.
Mr Miliband’s endorsement of the mansion tax, a key Liberal Democrat policy, reminds us that the Liberal Democrats have more in common with Labour than the Tories, who have vetoed a high value property tax. “Our 2015 Coalition Agreement with the Liberal Democrats is getting easier to write,” quipped one Labour insider. In the short term, Labour will make mischief by forcing a Commons vote on a mansion tax, giving Nick Clegg a dilemma.
Last but not least, the Miliband announcement helps to defuse the growing criticism that Labour has few policies. Although his aides say this perspective is confined to the commentariat, several Shadow Cabinet members were rightly becoming restive. “We have some big ideas on the economy, but it is all a bit vague,” one grumbled.
Thursday’s announcement is a good start but does not amount to an economic policy. It is largely totemic. It could even be worth less than Labour’s claimed £100 a year for taxpayers on the 20p basic rate. One question for all three parties is whether their headline-grabbing tax cuts will be diluted by Iain Duncan Smith’s universal credit, which will streamline the benefits system from this year.
It is based on net income, meaning that people could lose 66p of the value of any £1 tax cut. There is little point in trumpeting a tax cut for the low paid which doesn’t really help them.
The 10p tax announcement reminds us that, even in hard times, there are choices to be made. It tells us something about Labour’s priorities. There will be more signals soon, and not before time. After a false start last year, the first phase of Labour’s policy review, covering 17 areas, will be completed in July.
There will not be a “big bang” launch, but more small explosions like the 10p tax plan. Labour’s “two Eds” are scarred by their party providing too much policy detail at the 1992 election, handing precious ammunition to the Tories.
Their preferred model is 1997, when Mr Brown announced that Labour would stick to Tory spending limits only four months before the election.
I am not sure their reading of history is right. By January 1997, New Labour had already put down firm foundations, so the Brown pledge was credible. A similar last-minute promise in 2015 will not work unless One Nation Labour is well established by then.
Labour should not delay its inevitable promise to stick to the Coalition’s post-2015 spending limits, while reserving the right to “switch spend” within the ceiling. “Fair taxes” are only a small part of the picture. The $64,000 question for Labour is why voters should trust it at a time when spending will have to be cut rather than increased.