John Rentoul: What on earth was Osborne thinking?

The granny tax may have been an oversight, but the 50p tax cut was quite deliberate – and a more serious mistake

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When The Guardian led its front page with "Osborne poised to slash top rate of tax from 50p" five days before the Budget, Ed Miliband and Ed Balls could not believe it. Could George Osborne, the supposed genius of the political game, really be about to present them with a gift marked "tax cut for the rich"?

As Miliband worked on his response to the Budget with Torsten Bell, his chief economic adviser, over last weekend, they became more sure that the Chancellor intended to go ahead with it. Miliband's speech, including the lines taunting the Cabinet about whether they would benefit personally from the cut in the 50p top rate of income tax, was ready on the day before the Budget. But Miliband still could not trust his good fortune. When he took his place in the chamber, his Parliamentary Private Secretary, Jonathan Reynolds, sat behind him with a copy of a second speech. This version, known in Miliband's office as "Plan B", was a response to a Budget in which the Chancellor said that the 50p rate would stay until the deficit was under control.

But Osborne did not say that. Instead, he said: "From April next year, the top rate of tax will be 45p." And Miliband, suitably prepared, gave one of his most relaxed and cutting Commons performances. Preparation makes a difference: he had some good lines, including one about the Prime Minister now being "able to buy his own horse". And conviction helps too: the son of his father rather than the brother of his brother, he believes in class politics. So the Government front bench squirmed, and when Miliband went into the repeated refrain of "same old Tories" it did not sound like a tired slogan but an accurate analysis.

Budgets have been well received in the past, or, more often, badly received. But never has a Budget been received so badly with so many people asking, "Why did he make such a mess of it?" It was not just the 50p cut, but the unexpected squeeze on pensioners, instantly named the granny tax. And it was not just the reception in the House of Commons that mattered, although I am told that Miliband was congratulated after his speech by "several" senior and backbench Conservative MPs who did not like the Budget either. But newspapers and public opinion were overwhelmingly hostile, too. The Daily Telegraph used the size of headline reserved for the outbreak of World War III to denounce the granny tax, and the Daily Mail accused Osborne of "picking the pockets of the elderly". Particularly notable was the extravagant reaction of The Sun, with several angry headlines over two days attacking the tax cut for the rich and the coming fuel tax rise as well as the granny tax.

So what were Osborne, David Cameron and Nick Clegg thinking? The granny tax is easier to understand than the 50p cut. Damian McBride, the former Treasury official who was Gordon Brown's communications director, explained how Budget preparation works in a revelatory article on his blog on Friday. He described how hundreds of proposals, called "starters", are entered on spreadsheets for sifting in the months before. Freezing the extra personal allowances for pensioners was presumably a "starter" invented by civil servants hoping to make a saving that could be passed off as a simplification. As McBride noted, several starters that should have been "non-starters" (he recognised VAT on hot takeaway food from his time in the Treasury) seem to have got through the many rounds of scrutiny this year. Amazing though it may seem, it looks as if the Quad of Cameron, Osborne, Clegg and Danny Alexander were distracted by a long tussle over the more political decisions, especially on the 50p rate.

The granny tax may have been an oversight, but the 50p rate decision certainly was not. How do we explain that? I was told that Osborne believes that "the 50p rate is a real problem, a real drag on growth, a signal to the world that we're not open to business". But this is a matter of almost theological belief. It is not well supported by the evidence. The 50p rate has not been in place for long and the evidence that it, rather than a theoretical 45p rate, raises only £100m a year is particularly sensitive, in the absence of solid evidence, to assumptions about people's behaviour, which is a complicated way of saying "guessing".

Osborne's ambition to succeed Cameron may have been a factor, hoping that his ideological boldness would impress Tory MPs. But, suddenly, Osborne has retoxified the Tory brand and poisoned Cameron's claim to the New Labour centre ground. The 50p rate may be undesirable, but it is an important statement of intent that we are "all in this together" – a phrase that Osborne omitted from his Budget speech this year. Now, only one-fifth of the way into the spending cuts that are needed to fix the deficit, cannot be the time to announce its ditching.

Nor did the Chancellor even get rid of it straight away. He announced that it would be kept for another year, before being cut to 45p. That is the worst of two worlds, the political and the economic. Politically, the "government of the rich" headlines will go on until next April, by which time the deep damage to the reputation of the Conservatives – and of the coalition – will have been done.

Economically, the damage it supposedly does is prolonged unnecessarily. But the reason Osborne gave for delaying the cut was a political one: that he had made a promise to keep the rate as long as his freeze of public sector pay lasted.

Miliband's incredulity was justified. The timing of the 50p cut makes no sense. The arguments for it are feeble and those against are strong. Osborne has fixed the Conservatives as the party of the rich. The Tories were set to win a majority at the next election. Now they are not. The Budget was as disastrous as that.

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