Andrew Grice: Osborne playing with fire over the 50p tax rate

Inside Westminster

When George Osborne consulted Conservative MPs about next week's Budget, he flashed a bit of right leg. Well, politically if not physically. Asked about David Cameron's ambition to head the "greenest government ever" at a time when business could not afford to go green, the Chancellor told the 1922 Committee with a smile: "Everyone knows my views." (Last November, he warned that burdening companies with endless environmental goals would result in businesses failing and jobs being lost).

At the pre-Budget meeting, he encouraged Tory MPs to write to ministers setting out their concerns about green issues. "He was lobbying against his own Government's policy," one MP said afterwards. Another said: "Osborne is playing to the right-wing gallery."

Some senior Tories believe one reason why Mr Osborne is so keen to abolish the 50p rate of tax on incomes over £150,000 a year is that it will play well with his own party. The Chancellor would not be the first political animal to keep an eye on his own long-term prospects.

He is well aware that Boris Johnson, the Mayor of London and his chief rival in the future Tory leadership stakes, is lobbying hard and publicly for the 50p rate to be axed.

Mr Osborne is a busy bee. As if his day job were not big enough as he tackles the deficit and tries to jumpstart a flatlining economy, he is also David Cameron's chief strategist and normally attends the meetings of the Prime Minister's inner circle at 8.30am and 4pm each day. His influence could become even greater when Steve Hilton, the PM's closest adviser, departs for California in May.

Mr Hilton, partly on the advice of his New Labour friends, nags Mr Cameron to rush through as many reforms as possible in case the Tories lose power in 2015. Conversely, Mr Osborne proposes a longer game, in which everything the Tories do must pass one test: will it help them to win an overall majority next time?

The Chancellor will measure his Budget against this yardstick, but does not have a free hand. He admits it will be a "Coalition Budget" and he must agree key measures with the Liberal Democrats. He and Mr Cameron are irritated by Nick Clegg's strategy of negotiating in public, which may have given the impression that the Treasury has a pot of gold at its disposal.

The opposite is the case. When he stands up in the Commons at 12.30pm on Wednesday, Mr Osborne must perform a very difficult juggling act, pleasing three key audiences without any extra money to play with. Business will be looking for an end to the 50p rate and tax cuts for firms to help fill the gaping hole in the Coalition's economic strategy – a credible plan for growth. Middle-income earners are waiting to see whether Mr Osborne bows to pressure from the PM to soften the impact of withdrawing child benefit from families with at least one person on the 40p tax rate from next January.

Low-income groups will be watching to see whether Mr Clegg wins his battle to speed up progress towards the Coalition's goal of a £10,000 a year tax-free personal allowance, the Lib Dem signature policy.

The $64,000 question is how Mr Osborne pays for the higher per sonal allowance and his plan to scrap the 50p rate. He has already made clear it will not be through higher borrowing than planned. So he will have to announce where he will get the extra tax revenue – probably from the "tycoon tax" sought by Mr Clegg.

This could either be a 20 per cent minimum tax rate for all, to stop millionaires exploiting loopholes so they pay a lower proportion of their income in tax than people on the basic 20p rate. Or, more likely, a big crackdown on such loopholes billed as a "tycoon tax" so that Mr Clegg could claim a second Lib Dem "win".

As the Con-Lib Dem negotiations reach their climax this weekend, the biggest headache is over the 50p rate. The Coalition's challenge is to convince the public the top rate will be replaced with significant measures that hit rich tax avoiders.

Without that, scrapping the 50p rate could be political dynamite that blows up in the Government's face, the moment when the voters judge we are definitely not "all in this together".

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