Comment: Spectre of Brown’s 10p tax rate haunts Osborne

Jeff Salway
Jeff Salway
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THE noises coming out of the Tory conference last week were unmistakably of a party in triumphant and confident mood.

Some would say cocky and complacent. For hovering over the conference was the ghost of Gordon Brown, as rumblings of discontent over cuts to tax credits began to sound familiar.

There are parallels between Brown’s decision in the 2007 Budget to scrap the 10p tax band and Chancellor George Osborne’s cuts to tax credits. Brown was forced a year later to admit that he’d got it wrong. There’s a decent chance that Osborne will have to do likewise.

There’s are key differences. Brown’s move was rooted in some economic sense. He had introduced the 10p tax band in 1999 as a way of incentivising those on low pay, but the immediate consequence was increased tax complexity, while the beneficiaries tended to be those further up the scale.

By the time he announced that it would be scrapped, he had introduced the tax credits system, which proved a more effective way of supporting those on lower incomes. The abolition of the 10p starting rate of tax was backed by the Institute for Fiscal Studies (IFS), but it soon became clear that millions of people would be worse off. The backlash, led by Labour backbenchers, was fierce and Brown, who responded in May 2008 by announcing compensation for those affected, was left with his authority seriously undermined.

Tax credits could do the same for Osborne. At least Brown’s error was borne of good intentions.

That certainly can’t be said of Osborne, whose argument on tax credits has typically relied heavily on distortion. The changes announced in July will cost millions of working families an average of £1,000 a year, said the IFS, including 250,000 in Scotland.

Osborne claimed that “a tax credits system Gordon Brown said would cost just over £1 billion in its first year ended up costing £30bn, with payments being made to nine in every 10 families with children”.

This is utter rubbish. Osborne’s figures for the initial cost of tax credits are “confusing at best, wrong at worst and not useful in any case as they don’t take into account price inflation”, the Full Facts website concluded.

The line about payments to families with children is downright misleading – there are almost 11 million families in the UK with children, but the number eligible for tax credits is just over 3 million. Even if you look at those eligible, that’s well below nine in every 10.

Osborne insists that the new “national living wage” (NLW) will compensate for tax credits, a claim IFS has since demolished. Some 8.4 million families with someone in paid work and eligible for tax credits will be worse off by an average of £550 a year as a result of cuts, even after the NLW is factored in.

Osborne probably thought he was getting away with it, until one Tory-supporting paper last week called for a rethink of plans to cut tax credits, which it described as “bonkers”. Several Tory backbenchers concur.

Will tax credits be Osborne’s poll tax? Probably not, considering the cruel, vindictive measures already being imposed on vulnerable, disabled and low income households.

But it does have the potential to be his 10p tax rate, an error that could – and hopefully will – come back to haunt him.