Coalition in chaos as Cameron says 50p income tax rate is temporary

DIVISIONS over tax reform in the coalition government have widened as Prime Minister David Cameron insisted that the 50p rate for the highest earners was only temporary.

Mr Cameron’s words came in response to a letter from 20 leading economists calling for the abolition of the top rate for those earning £150,000 or more, because, they claim, it made the British economy uncompetitive.

But in contrast to Mr Cameron’s position, the Lib Dem Chief Secretary to the Treasury Danny Alexander insisted the 50p rate should stay. The new row came ahead of a meeting of the Bank of England’s monetary policy committee today, where the issue of stimulating growth in the economy will be discussed.

The members are under pressure to agree to a second round of quantitative easing, putting new money into the economy by printing extra banknotes.

Yesterday, calls for the measure were led by the Institute of Directors. Graeme Leach, its chief economist, said: “The time to launch QE2 has arrived. The downside economic risks are sufficiently great to warrant an extension in quantitative easing now, in order to avoid the risk of a double-dip recession.

“We already have an L-shaped economic recovery, and the hit to business and consumer confidence over the summer risks a slip back into recession, which could have dire fiscal consequences. Expanding QE by £50 billion initially is a sensible and limited response.”

However, as the committee prepared to debate the merits of pouring extra money into the economy, the government was divided over how to treat the wealthiest at a time of cuts.

The 50p rate was introduced by former Labour chancellor Alistair Darling as a temporary measure to help pay for the bailout of banks, and the Tories want to scrap it as early as possible.

But yesterday Mr Alexander said in an interview in the New Statesman: “At a time when the whole country is facing serious financial challenges, the priority needs to be people on low and middle incomes.

“I don’t see why we shouldn’t be trying to get to a situation where people in a full-time job on the minimum wage are paying no income tax at all.”

However, Downing Street reiterated that the 50p income tax rate on top-earners is a temporary measure.

Mr Osborne has ordered HM Revenue and Customs to carry out a review of how much money the 50p rate is actually raising, though the results are not expected until the spring.

Mr Cameron’s official spokesman stated official policy – as set out in the coalition agreement – was that lifting the income tax threshold to £10,000 should take priority over other tax cuts.

The spokesman said: “As the Chancellor said at the time of the Budget, the 50p rate is a temporary measure. He has asked Revenue and Customs to conduct some analysis on the amount of money being raised by the 50p rate. That analysis is ongoing.”