Labour’s 10p tax rate dismissed as 'gimmick'

Director of Institute for Fiscal Studies claims coalition’s move to cut the tax-free personal allowance achieves a similar outcome for low-paid workers

The director of the Institute for Fiscal Studies thinktank has rubbished one of Labour’s key policies for tackling in-work poverty, the 10p starting rate of income tax, describing it as “pointless” and a “gimmick”. Speaking in a debate about the parties’ manifesto pledges at City accountancy firm Moore Stephens, Paul Johnson said Labour should have “learned their lesson” after introducing a 10p rate and subsequently abolishing it during Tony Blair’s premiership.

He said the coalition’s tax-cutting policy – an increase in the tax-free personal allowance – achieved a very similar outcome for low earners “without introducing unnecessary complexity”.

The Conservatives have pledged to increase the personal allowance to £12,500 by 2020, continuing a policy that was initially pushed by the Liberal Democrats as part of the 2010 coalition agreement. Labour’s manifesto promises instead to reintroduce the 10p income tax rate for the lowest earners, which would be paid for by cancelling the Conservatives’ plans for a tax break for married couples.

Gordon Brown introduced the 10p rate as chancellor in 1999, then repealed it in his 2007 budget, shortly before succeeding Blair as prime minister. The move caused controversy as it was regarded as a tax increase on low-paid workers.

Johnson, whose pithy interventions have caused embarrassment for all the major parties since the election campaign kicked off, opened the debate by stressing the gulf between the two major parties’ tax and spending plans. “I see there being a very big difference, at least in terms of what they’re saying, between the Conservatives and Labour, on fiscal policy – perhaps the biggest difference for a very long time,” he said.

While it was not the focus of David Cameron’s upbeat campaign launch on Tuesday, the Conservatives are planning to eliminate the entire budget deficit – on both current and capital spending – over the next three years, and Johnson repeated his claim that this would require “colossal” spending cuts or tax rises, worth tens of billions of pounds a year.

Labour, meanwhile, has been “deliberately vague” about when it wants to achieve its more modest target of eliminating the current budget deficit, which would allow a Labour chancellor to continue to borrow to fund investment.

Johnson stressed that the IFS’s analysis suggests Labour could meet this aim without making additional cuts. He also criticised all the parties’ claims to be able to raise large sums from cracking down on tax avoidance, saying they are based on “made-up numbers”.

Separately, the debate underlined the fierce opposition Ed Miliband will have to face if he manages to form a government and presses ahead with Labour’s plans for increasing the tax burden on the wealthy. Kevin Phillips, an international tax partner at Moore Stephens, said Labour was “playing with fire” by sending the message that Britain will no longer provide a welcoming environment for multinationals.

James Sproule, the chief economist and policy director of the Institute of Directors, said he was also concerned about the “mood music” coming from Labour. “We should just be appreciative of how much the City of London contributes to the British economy overall.” He added that the IoD will be “very, very critical” if Miliband comes to power and removes the non-dom loophole.

Johnson said it would be important to ensure that short-term visitors could continue to benefit from some tax exemptions. “My guess is if it does any significant damage, it will be if it’s giving a sense of the country being unwelcoming for people who want to come here for a short period of time.”

Labour has said it would not expect short-term visitors, staying for perhaps three or four years, to pay UK tax on their overseas