It's not perfect—but the new NEF proposal to scrap the personal allowance and offer a £2,500 payment instead at least prioritises the poorest over middle-class earners. So will John McDonnell go for it?by Chaminda Jayanetti / March 14, 2019 / Leave a comment
Shadow Chancellor John McDonnell MP. Photo: PA Politics is about trade-offs—even for Jeremy Corbyn. One of Labour’s biggest trade-offs at the last election was over welfare spending. By committing to running a balanced budget, making large spending pledges on tuition fees and the NHS, and protecting 95 per cent of people from income tax rises, Labour found itself with insufficient money to pledge to reverse years of savage welfare cuts. Enter stage left this week the New Economics Foundation (NEF), one of the few think tanks with a close relationship with the Labour leadership. NEF this week published a radical tax plan that would straightforwardly take money from the better off and give it to the poorest. The plan would work by scrapping the “personal allowance”—the level of earnings below which people pay no income tax. Since 2010, the government has relentlessly raised this allowance—from around £6,500 for most earners in 2010 to almost £12,500 this year—at an enormous cost to the public purse. But because of the welfare cuts that were taking place at the same time, many people on lower incomes lost money overall—and those whose incomes were already below it were cut out completely. Meanwhile, people on higher incomes, up to £125,000 a year, got a tax cut they often didn’t need and sometimes barely noticed. Like many terrible ideas, it’s very popular. But NEF proposes to do away with the personal allowance entirely and instead give everyone over 18 £2,500 a year, tax-free, be they in or out of work. Why £2,500? Because that’s how much most taxpayers save through the personal allowance—in other words, NEF wants to take £2,500 away from them, and then give it straight back. This may seem pointless. But because the new payment would go to everyone, it would benefit those currently earning below the threshold. People on the lowest incomes have seen no benefit from the rise in the personal allowance. They would each get £2,500 a year under the NEF plan. That matters. Merely ending the benefit freeze—as Labour has committed to do—effectively “bakes in” a decade of welfare cuts, which have driven steep rises in homelessness and malnutrition; it doesn’t undo them. What is Corbynism for if not this? By directly increasing the incomes of the poorest, NEF’s plan goes some way to addressing this—as some in Labour have noted. “This is just the kind of innovative thinking we need on how to fix the imbalances and problems of our tax system,” McDonnell said in response to NEF’s proposals. “I hope it will be the start of a debate about how we make tax more progressive and deliver the public services funding that is so badly needed after nine years of austerity.” Innovative indeed. Because, as McDonnell must surely realise, NEF’s plan drives a coach and horses through a key plank of his electoral strategy. Labour’s 2017 manifesto pledged not to impose any income tax rises on people earning below £80,000 a year—that’s 95 per cent of earners, according to the party. The reason for this apparently un-Corbynite move was to fend off the kind of ‘tax bombshell’ attack used by the Tories against Neil Kinnock in 1992 to devastating effect, and to encourage middle-class professionals angry about Brexit to defect from the Tories. It was key to Labour winning seats such as Kensington and getting within touching distance of taking former Tory strongholds that now sit prominently on Labour’s target list. But NEF’s plan observes no such niceties. Its key means of funding the giveaway to the poorest is by raising taxes on the better-off—not the top five per cent, but the top 35 per cent of households. Labour has actually supported Tory moves to increase the tax threshold so as to avoid upsetting middle-class voters; NEF is effectively telling the party to screech into reverse. To be sure, most higher earners would barely notice the resulting rise in tax. But as a Tory attack line, it’s a gift. The fact that taxes would be rising at all on comfortably-off—but not ‘rich’—professionals would give the Conservatives a badly needed crowbar to lever resentful Remainers back towards the party. NEF’s plans are not without flaws. In particular, whilst the £2,500 payment would be tax-free, it would still count towards the means-testing of benefits—in other words, large chunks of that £2,500 would immediately disappear in reduced benefit payments as claimants’ incomes rose. NEF’s own figures show that single parents, among the biggest victims of austerity, would benefit the least from its measures, and in many cases would actually lose out. Meanwhile pensioner couples, much less affected by austerity, would be the biggest beneficiaries. Furthermore, the scrapping of the personal allowance means income tax would be charged from the first pound of earnings. Benefit claimants would face higher tax bills than at present as jobcentre conditions drove them back into low-paid work. These plans would require tweaking. And as NEF implies, the softening of means testing and easing of benefit sanctions are necessary counterparts to these measures. But the proposal has put McDonnell on the spot. Labour has already backed away from a land value tax on housing since the last election. He has used up much of the low hanging fruit of politically easy tax hikes on the rich. If Corbynism is to justify its existence by improving the lot of the poorest, McDonnell needs to find the money to do so. That may mean junking his electoral strategy. At some point soon, Labour will have to choose: help the poorest, or protect the better off.