Ed Balls on top rate tax cut: a question of priorities
Andrew Neil: Ed Balls, you’ve been trooping round the TV studios since the Budget saying that the cut of 50p rate will cost the Treasury £3billion. You know as well as I do that’s not true.
Ed Balls: It’s completely true, and it’s actually there in table A2 on Page 51 of the HMRC Report. What they say is that the 300,000 legitimate top rate tax payers will be given £3bn. That’s an average £10,000 tax cut for millionaires, 14,000 of them they get £40,000. The HMRC then say they believe if you cut taxes by £3bn for those tax payers, other people currently avoiding tax will pay up £2.9bn, people from the Cayman Islands or whatever, that’s your net £100m figure. Now that latter [figure is] really uncertain, highly uncertain, but it’s a fact, a legitimate top rate tax payer will get an average tax cut of £10,000. How is that fair?
AN: But the cost to the Treasury might not be £3bn. It is well accepted, indeed the last Labour government accepted that when you change up or down the top rates of tax it changes people’s behaviour. There’s an argument over how much and the government and the Labour government had different estimates. For your three billion figure to be right you assume zero behaviour.
EB: No. What I said —
AN: Yes, you do.
EB: No, what I said was in the days after that legitimate tax payers who are currently paying tax are given, according to the HMRC Report, a tax cut of £3bn. The government then hopes – and I think these are government ministerial assumptions – that’s offset by this big behaviour effect. The behavioural effect is uncertain as you just said to Mr Fallon. The money might not come in. The net effect maybe –
AN: But there is one.
EB: Well look it may or may not be but that doesn’t take away from –
AN: Well is there one, so therefore your £3bn figure’s nonsense.
ED: No but –
AN: It may be two and a half, it may be two, probably isn’t the government’s hundred million but it ain’t three.
EB: Andrew, it’s not my figure. The £3bn figure next year is the HMRC figure of the static cost of the tax cut they hand over.
AN: The static cost?
EB: Yes and then they say maybe other people who aren’t paying tax may cough up. But that doesn’t take away from the fact the actual top rate tax payer is getting £10,000. Why is that happening?
AN: Well let me ask you this, Mr Balls. If it’s such a good idea and if you think the behavioural implications are zero, which is what you’re saying –
EB: I didn’t say that.
AN: – or close to, what stopped you from introducing a top rate tax on income on the super rich who did incredibly well when you were in power?
EB: Well look, the thing which happened was the global financial crisis which opened up the deficit, taxes had to go up and they were done in a fair way including the top rate which the government admitted on Wednesday would raise a billion pounds.
AN: But why didn’t you do before?
EB: Well look, the view I’ve taken on this - and this was in our Manifestos after ’97, it’s my view today I would rather every tax rate was lower if we could afford it, but that depends upon your priorities and at a time when you’ve got to get the deficit down and the government is raising taxes on pensioners and on families, the middle class paying more tax, why is David Cameron and George Osborne gambling a three billion tax cut to existing rich tax payers will somehow reap in some other revenues? A huge gamble.
AN: People got filthy rich under Labour. Filthy rich. Why didn’t you introduce a tax on those earning over £150,000?
EB: Look, the reality was the people on the highest incomes were paying more and more tax because incomes were going up. We also raised other taxes like stamp duty. We could have decided to put the top rate of tax up at an earlier stage. We did it in the global financial crisis people –
AN: You did it in the last 37 days of the Labour government; you were in power for 13 years.
EB: I think that’s too cynical. I think it was actually –
AN: It’s accurate.
EB: No, it was the global financial crisis which meant tax would have to go up for everybody needs to be done in a fair way. There’s no doubt, look, we could have decided to move early on the top rate of tax, the judgement was that wasn’t the right thing to do at the time, the world then changed.
AN: Well actually you identified the problem yourself when you were a minister. Just have a look at this, this is what you said: Let’s put it up on the screen. You said: ‘Having been a City Minister for a year, and seeing the reality of that world, I can tell you that high achievers are very, very mobile people.’ That’s why you didn’t do it. You thought if you put the tax up they would leave the country.
EB: It’s why, look –
AN: It’s what you said.
EB: It’s why it’s very very important to make sure on all the things you do on financial regulation, on taxation, on the wider economy, you do things in a way which doesn’t undermine Britain’s reputation in the world, and I have to say to you Andrew the decision – the way in which David Cameron announced to the Daily Mail the stripping of Fred Goodwin’s knighthood – the right decision by the way – that sent a terrible signal around the world. That’s the kind of thing I was talking about there.
AN: No, no, actually you weren’t. You were talking about your couldn’t put salaries up too much. You said ‘they’re very, very mobile people’ and how you deny there’s any behavioural impact at all when you put up or down high taxes.
EB: I didn’t say that.
AN: Yes, you’re claiming that for £3bn, that’s what you said.
EB: I didn’t Andrew. Look let me say it again. There is fact, a £3bn tax cut to the richest 300,000, £10,000 each on average. Question mark: How much behavioural effect will there be? If it’s zero the net cost is £3bn. If the government is right and it’s £2.9bn, well okay, but that is highly uncertain. The danger is this going to cost billions of pounds, even a billion pounds if the behavioural effect is only £1.9bn, a billion pounds which could have been used if they hadn’t done this now, not to have that tax rise which, as you said, it’s middle and lower – and lower income pensioners. This is a debate about priorities. Do you really think a big tax cut at the top is the priority now when pensioners are being hit in this budget in such an unfair way? Families too.
AN: It partly depends how much it costs, but let’s move on.
EB: it does, it does and that’s uncertain.
AN: Exactly, exactly. It might not be your 3 billion but let’s move on. Due to this budget –
EB: Well I think it’s looking as if it’s going to be quite a lot.
AN: The number of people, of tax payers paying 40p in the pound – I raised this with Mr Fallon – will reach 5m by 2014, up from 3.7m now. It incorporates quite a lot of the squeezed middle. Now you don’t have to be rich to be paying 40% anymore. How much should somebody earn before they start the 40p?
EB: Well, I don’t think Mr Fallon really quite explained to you exactly what was going on.
AN: No, I’m asking you. How much, what should the 40p band be?
EB: Well the 40p band that Labour will set in government we’ll set out in our manifesto when we’ve set out all our tax rates and I’m not gonna pick on one particular tax rate here or tax rate there, three years out when I don’t know the economic circumstances.
AN: So you have no idea where the squeezed middle should start to move into the higher tax band?
EB: Look, I’m worried about people who are in the higher tax band on £50,000 who are about to lose all of their child benefit. I think the squeezed middle is people on – below £40,000 and above £40,000 as well. Families who will lose potentially 15% of their disposable income because George Osborne has told them that they’re rich. I’m not sure if that’s right.
AN: Let’s move on to pensions. You put great stock on the wisdom of the IFS. That’s the Institute for Fiscal Studies. Here’s what they had to say about the pensioners’ change. Let’s just get that up onto the screen. They said: ‘that from this Budget we calculate that pensioners will lose, on average, about one quarter of one percent of their income in 2014.’ You’ve been scare mongering, haven’t you? You’ve frightened a lot of pensioners thinking they’re going to be hurt by a lot.
EB: What that quote doesn’t reveal is it’s actually the person who’s currently in their late 50s, 60, 61, 62 who’s about to be a pensioner who lose five times more. They lose over £300 a year because their allowance is removed entirely. And I think people look to that budget and said to George Osborne why do you think pensioners should be hit in this way now? What’s happened?
AN: But it’s the average isn’t it? If you’re poor it doesn’t affect you right. If you’re a poor pensioner you’re not affected.
EB: Yes, because most pensioners don’t pay tax.
EB: If you are a well off pensioner it doesn’t affect you either because you don’t get the higher threshold above £28,000. And even if you are an existing pensioner it’s only about £83 a year. You can agree or disagree about doing it but you’ve been scaring people and it’s not threatening to ordinary pensioners at the moment.
EB: New pensioners, about to be pensioners –
AN: I didn’t say that.
EB: – are hit by over £300. I said to the House of Commons on Wednesday afternoon existing pensioners hit by an average I think £83 a year. But actually it’s a signal that –
AN: You’re the man that put pensions up by 75p! Credibility’s lacking on this. You were part of the team that did it.
EB: Andrew –
AN: You did.
EB: Andrew, I will admit my mistakes. Will George Osborne? The 75p was a colossal mistake, but we actually had much bigger real terms increases in pensions. The government is dissembling to pensioners. The reason the pension’s gone up is inflation’s so high.
AN: I made that point to Mr Fallon.
EB: You did. They are cutting pensioners’ incomes and people say when the top rate tax is being cut for the richest, why are families and pensioners paying the price?
AN: Let’s move on to broader fiscal policy in our final few minutes. The government’s case is that long term interest rates are the best measure of monetary and fiscal policy credibility. Do you agree?
AN: You don’t?
AN: Well let me show you what you said then. Why did you say this in 2004? ‘Long term interest rates are the simplest measure of monetary and fiscal policy credibility.’
EB: Yes, that’s right in normal times. I made that speech in I think –
EB: 2003 or 2004. In a normal economy when the economy’s functioning in a sort of stable time that is true. However, as you know, when you get into a liquidity trap, when you have the kind of Japan or 1930s like problems we have at the moment where governments are resorting to QE because interest rates are so low, in those circumstances the interest rate becomes sticky, it becomes stuck. It can’t go any lower but it’s actually reflecting the weak state of the economy.
AN: I understand that but I read the whole of your speech in 2004. You put no caveats on that at all.
EB: Well that’s because I don’t think we saw – look if I had known in 2000 –
AN: No but you said this was right for all economic circumstances. You boasted about how our long term rates were lower than Germany’s for a period.
EB: And what rate were they at the time?
AN: Wouldn’t be more honest to say you’ve just changed your mind?
EB: No, because that’s not true. At the time long rates were about four and a half, five percent. Look, if I had known we were likely to be facing in Britain a Japanese style lost decade, because of the global financial crisis I’d have made a different speech, but actually governments around the world might have taken different decisions. So you’re right to say in hindsight we didn’t foresee this particular 30 star catastrophe. My argument with George Osborne is he doesn’t even understand it now. That’s why he is not seeing these low interest rates are a product of an economy not growing, stagnating, borrowing £150 billion more.
AN: But I just wonder if people wonder if you’ve learnt any lessons about spending, because you spent more in the boom years and you want to spend more now as we’re teetering on stagnation. Is there any time when you wouldn’t want to spend more?
EB: Part of the problem at the moment is that George Osborne’s spending more on unemployment, and I say wouldn’t it be better to spend money to getting young people back to work? It’s about how you spend, what your priorities are. Look, the global financial crisis. Lehman Brothers going bankrupt in New York didn’t happen because of –
AN: But is there any time when you wouldn’t spend more, because you seem to want to spend more in a boom and in a recession?
EB: When I was Secretary of State for Education after the global financial crisis I set out a billion pounds of spending cuts in education which I thought we should do, which Michael Gove attacked me for.
AN: If we were back in the good times again and Labour was in power, would you still increase spending by more than the growth rate of the economy as you did in power?
EB: I think that that depends upon the priorities facing the country. I think people will look at our university system, our education system, our transport system and so we need –
AN: So you would?
EB: In some – in some areas you would. In other areas you would spend less. I’m not making a general statement.
AN: So it’s keep on spending – but what do you say to some Labour people who’ve said to me, look, Ed Balls is a great shadow minister, he should definitely be in the Shadow Cabinet but he is tainted by being at the centre of the ancien regime. We’ll never regain our credibility till we have a new Shadow Chancellor with new policies?
EB: Well I say that the opinion poll today in the Mail on Sunday puts me ahead of George Osborne in public confidence at this stage of the economic cycle and the political cycle, that’s really –
AN: Do you want me to read aloud all the other polls that contradict that. You found one in your favour.
EB: There was one in the Standard three days ago as well. I would say in the end it’s not about polls it’s about whether you make the right arguments and whether people think you’ve got the toughness to make the right decisions, and for pensioners, for families and for jobs, I think Labour’s got better arguments than George Osborne. We’ve got to show though we’ve got the toughness to make difficult decisions. That’s why I went out controversially in January and said in a fair way stick to the public sector pay restraint at one percent. It was though, the right thing to do and I will carry on making tough decisions, but for different priorities than George Osborne.
AN: Mr Balls we’ve run out of time, I wish we had more, come back and see us we’ll continue our conversation.
EB: Any time, always enjoy it.
AN: Any time, we’ll keep you to that.
EB: Any time.Tagged in: 50p tax, budget, ed balls
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