New tax plans will help the middle classes, but do nothing to address inequality
The Queen’s Speech has launched the new Conservative government’s policies. Prime minister David Cameron described the legislative programme as ‘the bold first step of a one nation government … for working people that will bring our country together’. So what are the policies?
The government will legislate so that people working 30 hours a week on the National Minimum Wage will not pay income tax. In addition, there will be no rises in Income Tax rates, Value Added Tax (VAT) or National Insurance Contributions (NIC) for the next five years. A related government press release says that annual income tax personal allowance will increase from the current rate of £10,600 to £12,500 by 2020.
The above sounds populist but the details are not what they seem. The current minimum wage of £6.50 per hour is due to rise to £6.70 per hour from October 2015. Anyone working a 37 hours a week would earn about £13,000 a year, not enough to survive, but would still be liable to income tax and NIC. There is no commitment to a living wage.
The higher tax-free personal allowances may help the middle-classes, but will do nothing for 44 per cent of adults, including pensioners, whose income is already too low to pay any income tax. The freezing of the top marginal rate of income tax, currently 45 per cent, would no doubt be welcomed by wealthy elites and will do nothing to reduce inequalities.
The poor pay VAT at 20 per cent, the same rate as the rich. The most recent government statistics show that the poorest 10 per cent of households pay nearly 47 per cent of their gross income in direct and indirect taxes, whilst the richest 10 per cent pay 35 per cent of their income in taxes. The freezing of VAT means that the poorest would continue to be subjected to a regressive tax.
The doubling of free childcare to 30 hours a week for three-and-four-year-olds would be welcomed by many, but leaves a vacuum either side of those ages. The new provisions are to be partly funded by a reduction in the tax relief on pension contributions by those earning £150,000 or more, but precise details are not yet known. Local authorities will bear the brunt of the costs and have complained that the existing scheme is chronically underfunded.
This forces the local ratepayers to absorb the cost. No doubt, local authorities would carefully scrutinise the new funding settlement which could burden local residents even more.
The Conservative manifesto had promised to raise at least £5 billion a year from a clampdown on tax avoidance, but the Queen’s Speech was silent on this. In the 2010-2015 parliaments, the House of Commons Public Accounts Committee produced six reports on organised tax avoidance and urged the government to punish the designers and marketers of the schemes (big accountancy firms). Such matters do not appear to be on the government’s agenda.
The government is committed to reducing public expenditure by £12 billion a year. The first target is to reduce household benefit cap from £26,000 to £23,000. Charities have said that this would hurt families with young children, especially those living in major cities.
During parliamentary exchanges, the government was supported by acting Labour leader Harriet Harman who said that she was ‘sympathetic’ to the cap as long as ‘this doesn’t put children into poverty, increase homelessness, or end up costing more than it saves.’ There is no commitment to control house rental costs.
The UK workers’ share of the gross domestic product has declined to 50.5 per cent (see Table D), compared to 65.1 per cent in 1976. This is the lowest ever recorded. A major reason for this is weakness of institutions that can support workers claims for a higher share of the wealth.
In the absence of workplace democracy, such as the employee directors that Germany and Scandinavian countries have, the only effective tool available to workers is to withdraw their labour and bring intransigent employers to the negotiating table.
The law already requires compulsory balloting of trade union members for strikes. However, a new Trade Union Bill would require a 50 per cent voting threshold for union strike ballots, and additionally 40 per cent of those entitled to vote must back action in essential public services. In contrast, there are no constraints on the withdrawal of capital. Companies, even those funded by taxpayers, can shift production, fire employees and dilute pension rights without any ballot of shareholders, employees, local communities, creditors or taxpayers
Contrary to the spin, it is hard to see the legislative programme as the policies of a one nation government. The government is pursuing partisan policies that will do nothing to tackle poverty and inequality, or promote social justice.
Prem Sikka is professor of accounting at the University of Essex
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