From the TUC

Some thoughts on raising the personal allowance

26 Jan 2012, by Guest in Economics

Following yesterday’s poor growth figures, talk amongst the Coalition parties and their supporters is once more turning to finding a ‘growth strategy’.

Amid from the usual barrage of cutting the 50p rate, slashing capital gains tax and further deregulation (not so much a growth strategy as the usual shopping list of free-market policy demands) Nick Clegg is once again talking about raising the personal income tax allowance to £10,000.

Raising the personal allowance to £10,000 is long standing Liberal Democrat policy and features in the Coalition Agreement (although only as a ‘longer-term policy objective’) .

The allowance was raised by £1,000 in 2010 to £7,475 and is scheduled to rise to £8,105 this year. Clegg today will reportedly argue that:

“Today I want to make clear that I want the coalition to go further and faster in delivering the full £10,000 allowance, because the pressure on family finances is reaching boiling point.

“These families have seen their earnings in relative decline for a decade, compared to those at the top. That has accelerated since 2008, with lower real wages and fewer hours at work.”

There is of course a caveat to this. As Clegg has made clear this hasn’t yet been cleared by the Treasury and Clegg appeared this morning to say that the allowance probably can’t be raised to £10,000 in one Budget.

Just over one year ago, Clegg has making a similar call. As Faisal Islam wrote then, raising the allowance to £10,000 a year would cost £11.5bn annually by 2015 – an ‘uncosted tax cut’ of roughly similar magnitude to a temporary VAT cut, something which the Coalition appears to regard as reckless.

As such a move would be, I presume, permanent it would, unlike a temporary tax cut, increase the structural deficit – something which is hard to square with Osborne’s fiscal mandate. Of course the £11.5bn could be offset by tax rises elsewhere. But whilst Clegg seems to be in favour of higher taxes on wealth, his coalition partners are unlikely to agree to that.

Raising the allowance is usually talked of by Nick Clegg has a way to help the low paid and struggling, but as analysis by Howard Reed and Tim Horton pointed out in 2010, the distributional gains are hardly progressive.

• the measure would do nothing to help the very poorest, who don’t have income large enough to pay tax;

only around £1 billion of the £17 billion cost (6 per cent) actually goes toward the stated aim of lifting low-income households out of tax;

• households in the second richest decile would gain on average four times the amount than those in the poorest decile; and

• the policy would increase socially damaging inequalities between the bottom and middle.

Furthermore with the VAT rise costing families £450 a year on average even raising the allowance to £10,000 won’t offset this for many families.

It’s also unclear how effective a stimulus to demand such a move would be. The distributional analysis above suggests that the benefits would fall disproportionately to the better off –  those with the lowest marginal propensity to consume and so the least likely to actually spend it.

But despite all of the above, raising the personal allowance wouldn’t be the worst policy move in the world. I’d welcome almost any stimulus that might actually have some impact on growth at the moment.

Raising the allowance would certainly be a more effective stimulus than cutting capital taxes, a further 1% off corporation tax, cutting the 50p or further deregulation and attacks on workers’ rights – the other ideas currently being pushed on the government by its allies and outriders. Raising the personal allowance isn;t the best stimulus the Coalition could embrace but from the menu their supports are offering, it’s probably the bwest of a bad lot. 

2 Responses to Some thoughts on raising the personal allowance

  1. jonathan
    Jan 26th 2012, 7:58 pm

    I’m not sure any tax policy helps the poorest quintile. They have no money. Unless you refund the VAT they pay during the year or give them a credit – as in the US’ earned income tax credit.