Are we really “all in it together”?
As hints of an interesting debate about the recent London riots finally begin to emerge among our leading politicians, it looks like the dust has settled enough for the toxic state of the British economy to loom large once more.
Two years ago, George Osborne told the Conservative Party conference “we’re all in this together,” in reference to his ambitious plans to slash government spending and eradicate the deficit. He went on to say that he did not believe in “balancing the budget on the backs of the poorest,” and that he could not imagine withdrawing the 50% top rate of tax “while at the same time I am asking many of our public sector workers to accept a pay freeze to protect their jobs”.
Fast-forward to August 2011, over a year into Osborne’s tenure as Chancellor, and we have had two budgets and a comprehensive spending review that have announced over £80bn worth of spending cuts in areas as diverse as welfare, education and the police force. The Institute for Fiscal studies called Osborne’s cuts “regressive” and the Centre for Social Justice has warned that the government’s plans “are not sufficiently focused on the welfare of Britain’s families”.
George Osborne is not stupid, he knows that cuts in spending affect poorer families more than richer ones and yet he still claims that “the richest 10% are hit hardest” by his measures. Osborne is able to do this by assessing only the impact of tax increases and tax credits on how well a person is doing. Even when setting aside things like the happiness index, this seems like a terribly narrow way of judging how anybody is affected by the economic path chosen by the government. Cuts to public services are necessarily felt more intensely by the poor than by the rich, because poorer members of society tend to rely on a wider array of public services than their wealthier counterparts. To under-play the effect of spending cuts in this way is to be sneaky and disingenuous, and George Osborne’s rhetoric is evidently both.
Given the fact that Osborne’s spending cuts disproportionately affect poorer members of society, and his controversial decision to raise VAT is in the words of Prime Minister David Cameron, a “regressive” measure, you might think Osborne would try to save face by preserving some of the more openly progressive parts of fiscal policy. He has in fact tried to do the opposite, by sparking a debate over the 50 per cent top rate of tax, the very rate he touted as a totem of his “tough but fair” approach to adjusting the country’s finances back in 2009. Referring indirectly to the top rate of tax, the Chancellor recently said there was “not much point” having taxes that didn’t raise much money and were uncompetitive from a business perspective. His belief that the 50p rate is uncompetitive is based on the Laffer curve, which assumes that at 0% and 100% rates of taxation, revenue is zero because nothing is collected at 0% taxation and no incentive to produce is engendered at 100%. The key contention is that between these two points, there must be a rate that provides maximum revenue. Osborne’s claim is not simply that the 50% rate is beyond the level at which revenue would be maximum, but that the difference between this and a rate of 45% or 40% might be minimal, due mainly to the practice of tax avoidance.
I would say to George Osborne that whilst cutting the top rate of tax might be popular amongst a large coterie of wealthy Conservative Party supporters, it would send out the wrong message to the nation at large. Even if the tax is economically inefficient, in normal circumstances it should continue to bring in more money than a lower rate. It is not good enough for the Chancellor of the Exchequer to acquiesce to the forces of tax evasion and tax avoidance. It is his job to pursue other means to stamp out these practices and take the “tough action” he claims to be taking on these issues , rather than giving those people who indulge in these activities exactly what they want. If, by his own logic, the Chancellor cannot tax the rich and must cut the services cherished by the rest of society, what basis can he possibly have for saying “we are all in this together”? The 50p rate must stay, or at least be replaced with a very visible alternative measure. To do anything else would be politically naive, unfair, and nasty.