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Thursday 14th February 2013 | 15:01
10p or not 10p, that is the question today.
And it was the question back in 2007 when Gordon Brown used his final Budget to axe the lowest rate. This was Gordon's part of his masterplan to cut 2p from basic income tax to create a 20p* basic tax rate. The tax-cutting Chancellor would soon be Prime Minister and his bold move to 20p was going to be the centrepiece of the snap-election-that-never-was in autumn 2007.
Ed Balls has since insisted that dumping the 10p rate was Gordon's idea and not his (though a few people remember him pushing it hard at the time). Ed Miliband simply defended whatever was the Government line (from abolition to amelioration).
But Alistair Darling's memoir 'Back From The Brink (1000 Days At Number 11)'** has some key passages about just how stubborn Brown was at the time. And how the Treasury had drafted advice on just how many losers - 5 million - there would be. Crucially, Darling was one of the few to warn of the dangers as early as 2006 (not in 2007, when the truth dawned on many Labour MPs).
“I remember discussing his plans to cut out the 10p rate at the end of 2006. I could see the attraction of a simplified tax system but, I said, we had introduced it back in 1998 to get the lowest earners in the country out of tax and there would surely be many losers from its abolition.
“His reply was that when we introduced the 10p rate, tax credits were not yet in place. In addition to that, taxpayers at the top of the scale also benefited from some of their income being taxed at the 10p rate…
“The problem was that while many qualified for tax credits, many did not. It was not so easy to see how the losers could be compensated for the tax increase that would result from more of their income being taxed at a higher rate. Our conversations concluded with Gordon saying that more work was needed to deal with those who faced losing out from the abolition of the 10p rate.”
“A few months later, when I sat in his old seat in the Treasury looking over the books...I saw advice that painted an extremely bleak picture of the abolition. While 80% of households would see no effect on their incomes or would even benefit from the change, about 5 million households stood to lose out.
“Alarm bells had rung when I received letter form an elderly constituent just after Gordon’s final budget. She was aged over 60 and had calculated to the last penny how much she was going to lose. What was surprising was that so few others had picked up on the problem until the following spring just as it was due to come into effect.”
But deadpan Darling had a neat verdict on the cost of repairing the Brown error:
“As it was, in the autumn of 2007, I was told that it would cost about £6.5bn to ensure that there would be no losers. It seemed an enormous amount of money. A year later, it would seem small beer compared with the £50bn cheque I had to write to forestall a global banking collapse.”
When the issue came to a head before Easter 2008, Brown was still stubbornly refusing to listen. At a meeting of the PLP, Darling says:
“He kept insisting that the MPs questioning him were wrong: no one would be worse off when the 10p rate was withdrawn. I do not know why he said this.”
Quite. Darling ultimately came up with a simple though expensive solution. But the damage had been done.
FOOTNOTE: *The great irony of Gordon's 10p tax move was that he was actually considering a rival plan - to cut inheritance tax by allowing married couples to combine their tax-free allowance. (As Damian McBride pointed out last year).
Imagine if Brown had indeed gone down the IHT route in 2007. The 10p damage would have been all avoided. Osborne's electrifying conference announcement would have had less force, the snap election may have been still on.
Counterfactual politics, I know, but still....
** Darling has a typically self-deprecatory passage which recalls a trip to China and a session addressing business people and officials. The audience was so young that there was 'not a grey hair in the audience'. One charming Chinese guest then sidled up to him and asked "Do you dye your eyebrows?"
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