The shadow cabinet may have been kept in the dark but Ed Miliband did have a policy to announce on Thursday; and it was a big one which made the front of today’s FT.
With one stroke he has seized the political initiative, at least temporarily. The politics and fiscal implications are both worth examining in detail.
Clearly the promise of a new mansion tax is an attempt to steal the Lib Dems’ big idea and neutralise any lingering attraction between the third party and left-leaning voters. Labour is still vague about how the tax would work, however: it could still consist of a new upper rate of council tax on the most pricey homes. (Ed Miliband’s is said to be worth about £1.9m, incidentally).
Meanwhile by promising to reinstate the 10p tax band – albeit only in a limited way – Labour hopes to close down any attempt by the Tories to make a similar move. The party also wants to end any lingering anger at the original scrapping of the rate by Gordon Brown.
It was in the spring of 2008 that the changes kicked in as a way to make up for the then chancellor’s headline-grabbing 2p cut in income tax. Some 5.3m families – one in five – were left worse off, in particular low-earning younger people without children.
That decision “haunted” the Brown premiership, according to Gavin Kelly, head of the influential Resolution Foundation – which campaigns on behalf of low-income workers.
Mr Miliband’s pledge has also snuffed out hopes within the Tory party that George Osborne could make a similar move to prove that the Conservatives were still in tune with crucial C2 voters.
Many Tory MPs had warned that Mr Osborne needed to repair the reputational damage from last year’s Budget when he announced a cut in the top rate of income tax – derided by Labour as a “tax cut for millionaires”.
As Mr Kelly points out, opinion polls suggest that 9 per cent of the public think the Conservatives best represent the interests of low-paid public sector workers – a figure that still only rises to 14 per cent for those in the private sector.
Of course the chancellor could still reinstate the 10p band – a move urged by backbenchers such as Robert Halfon – but it would look as if he was merely responding to Labour’s initiative.
“They have had a road to Damascus moment,” Mr Halfon told the FT. “Imitation is the sincerest form of flattery.”
Labour also believes that its symbolic promise will be more easily understood than the Liberal Democrat emphasis on increasing the threshold at which people start to pay income tax – which should hit £10,000 by the general election. The current threshold is £8,105 and is set to rise to £9,440 next year.
The influential Institute for Fiscal Studies said raising the threshold further would be “a far simpler and more sensible way” of achieving Mr Miliband’s aims as it would be more progressive and avoid painful complexity.
Other experts said that the two policies had a similar effect on the same group of low-income workers; the question is which would be noticed.
Iain Mulhern, head of the Social Market Foundation think-tank, said that the 10p rate was “more politically potent” than the Liberal Democrat offer. “I think the biggest benefit is political,” he said.
In theory some 24m people will benefit from Labour’s promise; everyone on the basic level of income tax – earning less than £42,500. They would be some £100 a year better off.
But Policy Exchange, a rightwing think-tank, pointed out that with the arrival of universal credit – which is replacing a host of benefits – many of those people would only keep 33p in each extra £1 from the move.
“That is because of complex interactions between the tax and benefit system,” said Matthew Oakley, head of economics at the group. “It is essential that any move back to a lower bottom rate of tax goes hand in hand with consideration of the interactions with the benefit system.”
Jim Pickard
Kiran Stacey