George Osborne got the politics of the budget all wrong but Labour has yet to win back the public’s trust

When the outgoing Labour government decided to introduce the 50p income tax band it was a thinly disguised political trap for the Tories. The idea was to tempt them into outrage, putting them at odds with the banker-bashing public in the run-up to the general election. In the event, the Tories avoided the trap and the public became more worried about Labour’s ability to run the economy in general rather than bash the rich in particular.

What we now know, as a result of the recent budget, is that George Osborne believed the 50p tax trap was one worth being caught in and indeed the  single most important issue he wanted to expend his political capital on within the coalition at this time. By choosing to act now, midterm, he   demonstrates his true character: he believes part of his reason for being in politics is to reduce taxes on the wealthy and is prepared to take a short-term hit to do so.

It was a carefully planned manoeuvre, where he sought to  educe his risks by commissioning a carefully worded report by HMRC, getting the core assumptions checked by the Office for Budget Responsibility, and teeing up his mates to fund campaigns to collect economists and entrepreneurs to give him some cover. And he acted safe in the knowledge that while Labour would enjoy making a fuss, the party would not pledge to put the rate back up again, for fear, as I wrote last autumn, of looking ‘all 1970s ideological’ in our election manifesto.

The chancellor’s mistake was not anticipating how this would look in comparison with the raid on pensioners’ tax-free allowances. If rich bankers have not done too well in battle with the public in general, they have not a hope against grannies in particular; Osborne was on the wrong side of this one.

Which begs the question as to why he decided to top-slice people of pensionable age at all. My view is that he was honestly naive. He had employed a similar device back in 2010 when he made huge savings from the poorest by linking the uprating of all benefits to a less generous measure of
inflation. He got away with that because, in cash terms, levels of benefit still rose; people just could not buy as much with the money. This time too he pledged no pensioner would lose out in cash terms. But it was still a money-saving measure and, while the nebulous masses of the poor have no real advocate, we all know a granny.

More interesting is why he did not go for pensioners at the other end of the scale. Early briefings indicated he might abolish higher-rate pension tax relief – the anomaly whereby someone on a higher income has to pay less to get £1 in their pension pot than someone who pays basic rate tax. It would have been straightforward to proceed along this path. It is clearly a regressive policy and Labour had already intimated it was looking to change it. As it was, he just tightened the overall limits a little to prevent large-scale tax avoidance. The fact he shied away from wholescale abolition is proof, if any were needed, that, aside from the tedious necessity of placating his coalition partners, the only constituency the chancellor really listens too are the affluent.

So how should we respond? For now, by all means let’s enjoy stoking up the battle of Gransnet vs the grandees and muse aloud as to whether Osborne has either just given himself a tax cut or has taken other steps to reduce his tax bill. But never presume that is enough to win the election. Because, while the public might well infer – rightly – from the budget that this is the same old Tory party that they knew in the 1980s, they also hear that Labour too has taken a lurch backwards.

The cure for this is the same as it has ever been. First, as the Labour pollster Philip Gould wrote in his diary way back in 1988: ‘We must sort out the economic policy as almost a discrete, separate product, sorted out and got right, and made into the bedrock of our credentials for government.’ Our pledge not to put up income taxes back in 1997 was part of the exercise to achieve that. This time round a radical and eye-catching fiscal rule might do the trick, perhaps  ncluding a clear commitment to bank a surplus when the economy grows above a certain level – something we did after 1997 but failed to do after 2005.

Second, we need to walk more in step with the hopes and fears of our electorate. The chancellor gives us an opportunity here. Every time he talks of boosting business, he forgets about the lives of those doing the jobs. And, third, we need to be genuinely exciting about our proposals to remodel the economy for our future. It is notable that the budget did not really move the markets. That is because it did not really change anything for our long-term growth prospects. This gives us scope to say how we would shape the  economy in the UK to boost growth and achieve progressive ends, be it through setting out in detail how we expect firms to invest the hundreds of billions we need to green our  infrastructure, or working with the insurance industry to make it easier for people to save for crunch points in their lives.

Osborne demonstrated in his budget that he does not deserve the public’s trust. But we still have some heavy-lifting  policy work to do to win it back.

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Kitty Ussher is a research fellow at the Smith Institute and a former economic secretary to the Treasury

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Photo: Catherine Smith