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The tax debate at the heart of the Budget

19 February 2012

1:47 PM

19 February 2012

1:47 PM

The run-up to last year’s Budget was all about fuel duty. This year it’ll be
all about direct taxes. The Lib Dems are determined to put their manifesto pledge of raising the income tax personal
allowance to £10,000 front and centre. They already managed to turn this promise into government policy in the Coalition Agreement, and last year’s Budget announced that the threshold
would rise to £8,105 in April this year. But Nick Clegg’s made clear that he wants to go ‘further and faster’
on this. The Conservative response at the Treasury – according to today’s Telegraph – is simple: ‘how are they
going to pay for it?’

Initially, Nick Clegg has answered this with three revenue-raising schemes: a General Anti-Avoidance Rule, of the sort proposed by the
Aaronson Review
in November; clamping down on stamp duty avoidance; and a 1 per cent ‘Mansion Tax’ on properties worth over £2 million. Danny Alexander has also pointed to another proposal from the Lib Dem manifesto: removing the higher-rate of tax relief on
pension contributions. And now, the Lib Dems’ Federal Policy Committee has put all these policies together – plus a couple more – in the form of a motion to be debated and voted
on at their party conference in three weeks. You can read the full ‘Making Tax Fairer’ motion here, on page 37, but the Independent has a good summary of it, complete with estimates of the
costs and benefits of the measures, here. Interestingly, while the Mansion Tax
is the more talked-about and controversial policy, the estimates suggest it would raise far less (£1.7 billion) than axing the higher-rate of tax relief on pension contributions (£7

In the Observer, Andrew Rawnsley predicts that Osborne will give in to the Lib
Dems on raising the personal allowance further, not least because it is incredibly popular with the public (today’s YouGov poll shows 88 per cent support for it). It’s also worth remembering that many
Tory MPs support such an income tax cut, with one or two even trying to claim the policy as their own. On the other hand,
Iain Martin in the Telegraph doubts Osborne will go for it, claiming the Chancellor ‘is
wedded to the numbers in his deficit reduction plan and is not convinced by the idea that reducing taxes can stimulate growth.’

And, of course, while the wrangling goes on between the coalition partners, Ed Balls is keen to ensure that he is not forgotten. In the Sunday Times (£), he redoubles his call for a temporary VAT cut (as Fraser noted earlier), but also comes close to backing Clegg’s policy:

‘If George Osborne can’t bring himself to reverse his Vat mistake, he has other options. For the same amount of money, he could cut the basic rate of income tax by 3p for a year.
Or raise the income tax personal allowance to more than £10,000. Or increase tax credits for almost 6m working people by about £2,000.’

If Osborne does relent and give the Lib Dems their income tax cut next month, Clegg and Alexander will rightfully claim the credit. But expect Balls to claim that it was really the
pressure from him that brought the Chancellor round.

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