Are George Osborne’s tax credit cuts really his 10p tax debacle?
“History doesn’t repeat itself but it does rhyme”, the phrase attributed to Mark Twain, is one that Westminster types like to wheel out to situate a new political saga in the context of previous conflagrations. Well, recent history is rhyming right now. At least that is the prevailing view of commentators who liken George Osborne’s planned cuts to tax credits to Gordon Brown’s decision to abolish the 10p starter rate of tax in 2008.
It’s not hard to see why. A major reform that appears to crash into the government’s narrative about itself. An impending slow-motion collision with an important part of the electorate arising from politically charged reforms to the tax and benefit system made by an all-powerful chancellor in a well-received budget that, with the passing of time, lost its shine in the face of a campaign led by some of those who once led the applause. Add to this the fact that Ministers sent out to defend the proposed changes adopt a credibility-shredding stance of denialism about the impending losses and the feeling of deja-vu grows. Just to add to the sense of ground-hog day both episodes feature a cameo for Frank Field MP as agitator-in-chief come hopeful deal-maker.
Look closer, however, and the differences reveal as much as the similarities. What’s more they tell us something about the nature of the political dynamic that George Osborne is dealing with and how it may play out.
In key respects, the Chancellor’s problem is far bigger than Gordon Brown’s ever was. Above all, the losses facing the working poor now are much more severe; in fact, roughly five times so, much more for many households. Make no mistake these are brutal cuts. Looking back at the 10p tax debacle it is hard not to be struck by how the losses involved pale in comparison (a maximum loss of £232, with the clear majority gaining).
The identity of those losers is different too: now it’s overwhelmingly low and modest income working families with children; in 2008 it was low-earning fifty somethings and early retirees, neither of whom qualified for the compensating tax credit increases or pensioner boosts. And the judgement of influential independent experts varies too: the 10p tax rate was always viewed suspiciously by many tax-specialists (like the IFS) who didn’t mourn its passing; the same couldn’t be said about in-work tax credits that often make employment worthwhile.
But in important regards Mr Osborne’s political discomfort is less acute. Context is often king in terms of how these Budget backlashes play out. And for Mr Osborne the context is dramatically more benign then it was for Gordon Brown. By the time the 10p tax rate was abolished the Labour government was already on the ropes, Gordon Brown was still reeling from the ‘non-election’ disaster, and David Cameron was looking ever more Prime Ministerial.
The internal party dynamics are sharply different too. In 2008 an already down-beat and highly agitated Parliamentary Labour Party reacted viscerally to the abolition of the 10p rate on the basis that judged it hurt ‘our people’ (and further demotivated activists ahead of a tough election). If large scale palliatives hadn’t been offered up Gordon Brown and Alistair Darling would have faced a full-scale parliamentary riot led by their own side.
By contrast today’s Tory backbenchers, despite their small majority, are generally feeling chipper about the overall state of politics even if they are increasingly angsty on this particular issue. They know for sure the next election is miles away and few have much love for a tax-credit system they didn’t invent.
And, crucially, there are differences in the nature of the potential escape routes. The parliamentary uprising against the proposal to abolish the 10p tax rate set up a big, bad, binary choice for Gordon Brown: undertake a vaulting U-turn by keeping the 10p rate or plough on regardless and scrap it. There wasn’t a viable half-way house. (Sure, a highly expensive increase in the personal tax allowance was made to help compensate those who lost out, but it never really commanded the headlines).
Today, it’s different. Relatively few people — politicians and journalists included — really understand tax credits: the language of ‘tapers’ and ‘earnings disregards’ creates a thick fog around them which provides Mr Osborne with cover to say he is sticking to the plan at the same time as he softens the blow. When Mr Osborne acts in next month’s Autumn Statement, as he surely will, there will be plenty of scope in the media for messiness and mis-understanding about what the Chancellor has really done.
With the benefit of hindsight, Gordon Brown’s saga now looks like a case of: right policy, disastrous politics, catastrophic timing. In contrast, George Osborne’s episode might be characterised as: wrong policy, poor politics, perfect timing.
None of which is to say that Mr Osborne doesn’t face a toxic problem. Either his ‘One Nation’ or his ‘low tax, low welfare’ rhetoric is about to take a big hit. But compared to the situation Labour faced in 2008 he’s got political momentum, policy opacity and tactical room for manoeuvre on his side. They are likely to prove useful allies.
