We wrote this morning about the Tory backlash to Nick Clegg’s speech in which he called for an acceleration of the personal tax allowance – which is currently pencilled in for 2015.
One way to interpret his words was a further attempt by the Lib Dem leader to stamp his brand over the tax giveaway, one of the few pleasant fiscal moves of recent years. (Although how progressive the change is has been the subject of debate.) The Lib Dems have been tacitly authorised to “own” the personal allowance issue – just as the Tories have ownership of scrapping the 50p rate. The difference is that raising the allowance is part of the coalition programme and scrapping the highest income tax rate is not.
But is Clegg being realistic by suggesting that the move could be hastened even further? Nowhere did we hear any mention of the potential extra cost yesterday of accelerating an already expensive (£4bn) plan.
Today there are two figures knocking around – £1.5bn in the FT and £9.5bn in the Times.
Neither is wrong; they are just based on different calculations as to what might happen. (The Treasury estimates that each increase of £100 in the allowances costs just under half a billion pounds).
The Times calculation is based on the tax change happening in full immediately – ie not even waiting for next April. That seems unlikely.
Our calculation is based on the idea that the increase could be brought forward to 2014 rather than 2015, which is not impossible.
Key to understanding the allowance is the fact that even without government action the threshold would still move up every year automatically as a result of inflation. Without Treasury intervention it would rise from next April’s £8,105 to about £9,000 in 2015.
The estimate of lifting the cap to £10,000 over three or four years is therefore the equivalent of only a £1,000 rise – about £4bn.
Bear in mind that this will have to be found from extra spending cuts or tax rises because it is not “baked” into the Treasury assumptions for the public finances.
Mr Clegg signalled in the speech his desire to move “further and faster” on the goal, an aspiration that would cost even more.
Moving the £10,000 allowance forward a year to 2014 would cost an extra £1.5bn, according to calculations by James Brown, of the Institute for Fiscal Studies. That would mean a total bill of £5.5bn to be found by the government.
As Brown tells me:
“None of this money is already in the public finances at the moment. They assume that after April we’ll have normal indexation. They already have to find the £4bn from somewhere else, the OBR says there is no room for loosening, so your only hope is things turning out better than forecast or having to raise taxes or cut spending by even more.”