Con Lib V Labour Govt – Polly Toynbee – Taxes not cuts
Cuts will hit the poor hard. Tax rises would be far fairer
Polly Toynbee: If Cameron’s plans go through, the increase in inequality will be huge. But we could avoid this relatively painlessly
Saturday, 12 June 2010
My first outdoor swim of the season in south London’s beautiful Brockwell lido came with a nice surprise. Instead of paying the £5.20 adult price, the receptionist told me that it’s free for the over-60s, from a government fund.
Swimming up and down, I considered my winter fuel payment of £250 and my free eye tests, along with my valuable Freedom Pass to travel by tube or bus in all six London zones. Despite the crisis, before the election all these had been safely ring-fenced for me by David Cameron, because most older people vote – and a lot vote Tory.
I make no argument here against universal benefits, which give everyone a stake in the welfare state. But this is an example of how well this government may look after their core vote in these hard times. I regard myself as a good test case for Cameron and Clegg’s idea of fairness in this month’s budget. I am lucky enough to be in well-paid work. What’s more, like a lot of well-paid people, the new 50% top tax rate has not touched me as Labour only applied it to earnings over £150,000 – though those like me can well afford to pay more.
Thanks to Gordon Brown’s imprudence, the basic income tax rate was cut by 3p, paid for by hitting the lowest earners hard when their 10p tax rate was abolished. The recession has lowered my mortgage rate and quite a few prices. Cameron is making sure my children will not pay inheritance tax either.
So when he keeps saying “we’re all in this together”, I can’t see exactly where or how many of the better off are going to share the pain of the monumental cuts to come. By next year, some 750,000 people will join those already out of work, and forecasts this week warn many will stay unemployed for years. Not only will those families suffer, but welfare and public services cuts will be sharply felt by their most frequent users. So far few yet quite realise how crushing this landslide of cuts will be. Ministers announcing cuts in their departments still look proud as cats catching mice: that won’t last long when the public grows angry.
This week the Office for National Statistics produced its report on the effects of taxes and benefits on household income, 2008/09. It tells us, unsurprisingly, that the level of income inequality stayed the same. But it goes further, analysing who pays what in tax and who receives what in services and benefits. These facts will be vitally important in assessing Cameron’s “we’re all in this together” claim.
Professor John Hills of the London School of Economics chaired the National Equality Panel’s recent Anatomy of Economic Inequality in the UK. It found the top 10% had 100 times more wealth than the bottom 10%. By age 55-64, the top 10% of professionals owned on average £2.2m in property and pensions, while the bottom 10% of manual workers owned less than £8,000 worth of anything. Gordon Brown called its verdict “sobering”, as indeed it was: after 13 years Labour had no more than stabilised the gap, while the report concluded “the large inequality growth of the 1980s has not been reversed”.
I asked Professor Hills to look at this week’s ONS figures to consider the effect of the coming cuts. Are we about to plunge into another 1980s episode of steeply rising inequality? Examining the charts, he said that depends on whether the deficit is to be shrunk by cuts in welfare and services, or by raising taxes.
The bottom half of the population are heavy users of services and benefits, with more children and elderly than the top half. To raise £30bn, half the sum Cameron pledges to cut from the deficit, means raising on average £1,000 from every household. Hills calculates that if the money is raised by spending cuts, then the bottom fifth loses 12% while the top fifth would lose less than 1% – a startling difference.
But if that money were raised across all existing taxes, the burden would be more fairly shared, with the bottom fifth paying another 3.4% of their income and the top fifth paying 3.7%. “That shows starkly how different the impact will be depending on whether the money is raised in spending cuts or in taxes. Public service cuts fall disproportionately on the bottom half.” The Conservatives said they would raise £4 from cuts for every £1 in tax increases: the coalition says “most” from cuts.
If the money was raised through tax, how steep would that feel? Hills says to raise £30bn from across all taxes, VAT would go up from 17.5% to 19%, and income tax up from 20% to 21.7% – NI, tobacco, car licences and everything else rising by the same proportion. To raise the full £60bn Cameron pledges over the parliament would cost twice as much, so basic income tax would go back up to 23% – which is the same rate it was the last time the Tories were in power.
It would certainly be hard for many – but would that still be better than throwing 750,000 people out of work while cutting schools, social care, children’s services, transport, arts, benefits and almost everything by a brutal 25%? That is the hard question that was never put to the voters. That is the question Labour’s leadership contenders should be willing to put now. When people feel the cuts bite deep by next year, the worst since the war according to the Institute for Fiscal Studies, a wide consultation might well reveal people would rather pay more taxes, spread fairly, than see this slash and burn. But no one has put the case.
The CBI and British Chambers of Commerce have just put in their budget submissions to the Treasury. Demanding the cuts fall on public spending, they call shamelessly for easing tax on the rich: for the capital gains tax rise to be watered down with broad tapers, abolition of the 50% top rate soon, and tax reliefs on top pensions restored. The pain should fall on public spending and pay, but no cuts in business projects such as Crossrail.
If they prevail, the distributional effect will be shocking, falling 12 times harder on the bottom fifth than on the top. I don’t know if Cameron means what he says about social justice and fairness, but the ONS figures show the coalition government at a crossroads: if they choose mostly public spending cuts and few tax rises, Britain will suffer another soaring increase in inequality that, once entrenched, has proved almost impossible to reverse.
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