Give and take
The Liberal Democrats may have swallowed some extra spending cuts, but the Conservatives have taken on a lot of Lib Dem tax policies in return.
hat’s the first conclusion to draw from the seven page agreement between the two parties that’s just been published.
It’s not just the commitment to raise the income tax threshold to £10,000, though that is probably the biggest concession. We can now confirm the government will make a start toward this in April 2011, by raising the allowance by £1,000.
This would cost around £5bn. As I revealed last night, this will partly be paid for by not implementing the Conservative plan to raise the employee threshold for National Insurance. The remainder will come from raising capital gains tax for individuals.
The increase in capital gains tax rates is another Lib Dem proposal which the Conservatives opposed on the campaign, on the grounds that it would stifle risk-taking and innovation. In a nod to this, the document says there will be “generous exceptions for entrepreneurial activities”.
But it’s hard to believe they will be that generous, when the Conservatives are apparently seeking to raise rather more from this source than the Liberal Democrats were – about £2.5bn, rather than the £1.9bn anticipated by the Lib Dems.
(Interestingly, on the campaign the IFS had concluded these changes would raise more than the Liberal Democrats thought.)
Here are some of the other areas where the Lib Dems have got their way on tax: there will be a per-plane, rather than per-passenger tax on air travel – again, with any extra proceeds to go into raising the personal allowance.
There will also be “detailed development” of the Liberal Democrat proposals to raise money by tackling tax avoidance – another proposal that was much derided by George Osborne and others on the campaign trail.
As I reported last night, the Tories have not abandoned the plan to reward marriage in the tax code. But even here, the Liberal Democrats have not had to cede much ground – their MPs can abstain when it comes before Parliament.
The inheritance tax cut is in the long grass, well down the pecking order for tax cuts, in a parliament which is unlikely to provide room for many.
Intriguingly, there is no mention at all of the 50p top rate of income tax. Up until now, getting rid of that had been, in effect, the Tories’ number two tax priority, after avoiding the so-called “jobs tax”, though they weren’t going to do anything about it while public sector pay was being cut in real terms.
You have to wonder whether that’s been kicked into the long grass as well – especially when every spare pound of revenue is apparently going to be channelled into that hugely expensive commitment on the tax free allowance.
The Liberal Democrats aren’t going to get their “mansion tax”. And Britain won’t be preparing to join the euro any time soon. But, looking at events across the Channel, I suspect they will be able to keep their disappointment firmly under control.
Supposedly, the package won’t cost any more than the Conservatives’ previous tax and spending plans. However, it seems that some of the £6bn in spending cuts this year will, in effect, be used for targeted tax cuts to support jobs (the example given is the cancellation of “backdated demands for business rates.”)
Presumably the cost of that will be met partly by the change in the National Insurance plans.
However, the deal has once again narrowed the new government’s room for manoeuvre on spending cuts.
Remember going into this election, the Lib Dems didn’t want to protect the NHS from real cuts in spending, and the Tories didn’t want to protect the schools budget. Now, in effect, the government is committed to achieving real terms growth in both schools and NHS spending.
The Tories have agreed to fund a significant “pupil premium” for disadvantaged pupils from outside the schools budget, by finding spending cuts elsewhere – but they have stuck to their promise to raise NHS spending in real terms.
All this, against the backdrop of a resounding thumbs up for the deficit plans from Mervyn King this morning. More on that later.
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