Peter Hoskin

Osborne’s tax headache

Osborne's tax headache
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No doubt about it, George Osborne is being pulled in two directions ahead of the Budget. There are those, such as the Lib Dems, who would have him reduce taxes for the least well-off. There are those, such as Boris, who would have him reduce taxes for higher earners. As I suggested yesterday, this debate pivots around two particular measures: raising the personal allowance and cutting the 50p rate.

Rachel Sylvester develops the story in a typically insightful column (£) for the Times today. It quotes an "ally of the Chancellor" to the effect that Osborne is minded more to raise the personal allowance than to cut 50p. "Not many Tories want to reverse the 50p top rate," says her source, "We are big fans of raising the threshold and would see that as the priority."

Which is certainly an understandable position. To my mind, the Lib Dem proposal to raise the personal allowance to £10,000 makes moral and economic sense now, just as it did during the election. But that's where the real problem sashays in. Sylvester quotes another source saying that the cost of that policy could be "about £5 billion a year £5 – equivalent to more than a penny on the basic rate of income tax – or £20 billion between now and the election." Where is the government going to get its hands on that sort of money?

The coalition's approach, so far, has been to fund the personal allowance by pulling more people into the higher rate. But, as yesterday's press coverage proved quite adequately, that is precarious ground. With the cost of living rising savagely, the political tactician in Osborne will no doubt be reluctant to squeeze down harder on middle income earners.

And so we come to the 50p tax rate again. It has always been a political measure, rather than one designed to fix the public finances. The IFS says it could lose the Exchequer money. The Taxpayers' Alliance puts the total loss at £5 billion. I suspect the Treasury models will arrive at a similar conclusion. So, culling 50p – however politically difficult it is – could leave Osborne with more room for tax cuts elsewhere.

Which leaves us with a curious irony: that the Lib Dem cause might be helped by an end to 50p. There is potential overlap between the two sides, after all.