George Osborne begins his fightback

Allister Heath
­­­­­AT long last some red meat from the Tories. Their proposal for a partial cancellation of Labour’s national insurance tax hike is a small but important step in the right direction; it is good to see that they now want to pursue a dual strategy of deficit reduction combined with selected supply-side tax cuts. The idea is to combine austerity and pro-growth measures, which makes a lot of sense.

Partly as a result of his new proposal, George Osborne’s performance at last night’s clash of the Chancellors debate was strong and better than Alistair Darling’s (though an increasingly demagogic and populist Vince Cable went down depressingly well, being rewarded with cheers when he described higher-earners and City workers as pin-striped Arthur Scargills, after the 1980s trade unionist who almost destroyed the UK).

Predictably, the debate’s low point was the one-sided and undifferentiated attack on the financial services industry by all three candidates, including the false claim that Barclays was bailed out by the taxpayer and other factually incorrect statements. All three parties are continuing to propagate envy and hatred towards all those who work in finance with an ultra-simplistic analysis of the causes of the crisis; they also fail to differentiate between those who acted prudently – and those who didn’t, who do deserve to be vilified.

But the Tory shift on tax was most welcome. Labour will hike national insurance by 1 per cent in April 2011 on both employees and employers. Regrettably, Osborne agrees – but he wants to raise the level of earnings at which they start paying national insurance. Compared with Labour, the Tory reform would mean lower employee contributions for those with earnings between £7,100 and £45,500, with those earning £8,200-£44,000 gaining about £150 a year. Those on above £45,500 will lose out in the same way regardless of who wins. The Institute for Fiscal Studies calculates that the Tory plans would reduce revenues by £5.6bn a year in the short-term, eliminating much of Labour’s £6.3bn hike (the £700m remaining tax hike will hit those on above £45,500). In the longer-term, as the positive effect on job creation kicks in, the value of the Tory tax cut would fall to £4.3bn. The cuts would be paid for by finding £6bn of waste, which ought to be easily doable (much more can be chopped without affecting proper frontline services). Most spending cuts should go towards plugging the deficit but the Tories are right to allocate some towards reversing tax hikes and to help grow the UK out of crisis.

Is this is a perfect policy? Of course not. The national insurance hike should have been eliminated completely, including for the better off. If one can save £6bn, one can also save £6.3bn or £7bn. The Tory plans still tolerate a massive tax on jobs: a combined income tax and national insurance rate (including employers’ contributions) that starts at 30 per cent on the first £1,800 after the tax-free allowance, goes to 40 per cent below the higher rate threshold, jumps to 58 per cent for a while, before falling to 49 per cent and then up again to 51.5 per cent (and over some income bands between £100,000-£108,000 to well over 60 per cent). It is good to raise thresholds to take the poor out of tax, as the Tories are doing; but rates must also be cut to boost incentives. But the Tory plan is undoubtedly helpful. We need more from where that one came from.