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David Cameron pledged at the recent Conservative Conference that a Tory Government will raise the basic rate income tax threshold. This would help only some of those less well-off workers, since others among them earn less than the present one. Earlier, George Osborne had told the conference that a Conservative Government will freeze benefits to people of working age. Add to the palette Chancellor’s promise to scrap the 55 per cent tax rate on inherited pension funds, Cameron’s promised 40p threshold rise, and the Prime Minister’s recent hint of an early inheritance tax cut (first extended, then withdrawn), and a picture will be painted of the Conservatives preparing rewards for the rich and punishment for the poor – by Labour, the Liberal Democrats and perhaps by our new friends, Red UKIP.
This would be less of a portrait than a caricature, and a misrepresentation at that. As Osborne pointed out in his last budget speech, “the rich are making the biggest contribution to the reduction of the deficit”. None the less, too many people are willing to believe the parody for it to be allowed to pass. On paper, there are three main Heineken plans for Downing Street and Number 10 – that’s to say, ways of refreshing poorer voters that raising the income tax threshold won’t reach.
The first is to reverse Osborne’s approach to tax credits, and simply let the bill to the taxpayer rise further. It is true that government is always likely to make some form of payment to the working poor: for example, the Major Government had family credit. But there should always be strict limits to them, since they run the triple risk of being bad for the taxpayer, who has to meet the bill, for employers, who must wrestle with the bureaucracy that comes with them, and for recipients, who may be caught in an unemployment trap. Gordon Brown’s welfare payments (which is what his tax credits really are) realised all three hazards. The Chancellor has been right to prune them, and shouldn’t back off. None the less, the political dangers remain.
The Treasury may take comfort in polling that shows cuts in benefits for people of working age to be popular with most people. But do swing voters say the same in the midlands and northern marginals that the Conservatives must hold and win next May, where more of them will either be receiving tax credits, or have done, and think that they might again? Or know a friend or family member who is receiving them? This takes us to the second option for helping poorer workers. This is raising the minimum wage.
In Prime Minister’s Questions yesterday, Cameron told the Commons that the Government wants to see another real-terms rise in the minimum wage. “It is now at £6.50, and we will be presenting our evidence to the Low Pay Commission calling for another real-terms increase in the minimum wage,” he said. Perhaps the Commission will go along with the Prime Minister, and perhaps it will not. (Matthew Hancock, the Skills Minister, last year overruled it and increased the amount paid to apprentices). Raising the minimum wage above inflation will always be controversial – Mark Wallace has warned on this site against doing so for political reasons – but what is certain is that there is little consensus about the way it should work.
Some say, correctly, that paying the same rate in each part of the country makes little sense, given differences in costs (such as the Centre for London). Others (such as Bright Blue) say, again rightly, that some sectors and business are in a better position than others to pay out minimum wage increases. But although increases in the minimum wage would help to curb the tax credit bill – whether the rise was general or targeted – acting on these insights would pose as many problems as it would solve, perhaps more.
The Bright Blue plan would trust government to make the right judgements about which businesses and sectors should be rewarded. The precedents are not good, to put it mildly. The Centre for London has floated a higher rate for the capital. This raises again the question of costs for employers. In a nutshell, there is a minimum wage trade-off between higher pay and fewer jobs (particularly for smaller businesses). The third means of helping poorer workers avoids this dilemma. As Robert Halfon has reminded readers of this site, the national insurance threshold is lower than the income tax one. “Raising the threshold for National Insurance contributions would truly take lower earners out of tax, and show that it always pays to work,” he wrote.
ConservativeHome is dubious about tax-cutting talk while the deficit-cutting task remains. However, bring down the deficit and taxes together can happen to some degree, and already has: for example, the former has come down at the same time as the Employment Allowance has come in – this being, of course, the Chancellor’s scheme to cut NIC costs for employers. The ConservativeHome manifesto called for “tax cuts to be focused on those taxes that do most to ‘gum up the works’ of the economy – especially those that get in the way of homes, jobs and savings for ordinary working people”.
We listed Stamp Duty…and employees’ and employers’ National Insurance Contributions. This year’s Autumn Statement and next year’s budget would give Osborne an opportunity to act, since action speaks louder than manifesto pledges to a cynical electorate. Workers on the minimum wage should pay no NICS at all. And employers should get an NIC cut to balance any increase in it. This would be good for poorer workers, employers, the economy, and the Party’s electoral prospects – especially in those Midlands and Northern marginals. Here is an end for the Chancellor to work towards.