I can’t quite believe the Westminster village’s response to Thursday’s leaders’ debate and the polls that followed. I missed the first part of the show as a result of being in the last cabinet meeting before the election. I hated the format and felt that the way it was chopped up made it very un-engaging.
Up until now I have been largely happy to ignore the LibDems as an irrelevance. I did not take the time to read their manifesto before all of the excitement of the last few days. Judging by the outcome of the leaders’ debate you can only conclude that Tory leader David Cameron made the same mistake.
I have started myself to look a bit more carefully at what the LibDems are saying. I love the idea of a Â£10K starting rate for tax and indeed I have suggested it myself in the past, here. The way they want to pay for it though is one third fantasy and one third dangerous.
On page 100 of the manifesto, where they lay out how the Â£10K starting rate will be paid for, they identify Â£4,625 million of anti-avoidance measures. Well actually they don’t identify any they just pluck a number out of the air and stick it in a table to make their number add up. Anyone who is in business or has to deal with the tax authorities for any reason knows that this is a fantasy. For 13 years Labour has been relentlessly tightening up the tax system. Remember IR35? I get the taxman chasing me for tax on bits of interest I forgot I received.
The largest measure to pay for the Â£10K starting rate is an elimination of tax relief for pensions at the higher rate. This has to do Â£5,455 million, the largest share, of the work. This measure has to raise three times what the much talked about mansion tax has to raise.
This measure is dumb at least three times over:
- this measure hits ordinary people and ensures that they will have a straightened old age. High rate tax payers aren’t just the “rich”. They are you and me when, hopefully, we get on in life and get promoted or do well in business. We might be struggling to pay off debt and get on the housing ladder in our twenties – pension contributions postponed. We might spend our thirties and forties raising children and paying the mortgage – pension contributions postponed again. Just when we get our heads above water and need to start seriously thinking about how we fund our retirements and along come the LibDems to further bash our already damaged pensions system. Anyone over 40 voting for this measure needs to be altruistic – it will really hurt
- this measure will encourage consumption and reduce investment and the savings ratio. I assume that the LibDem figures imply Â£27.5 billion of pension contributions put in question every year. A large chunk of this is going to leak into consumption rather than savings every year as people decide to spend money now, taxed at 40%, rather than save with a 20% tax and then pay 20% income tax in the future
- finally, are we going to see a debt funding crisis? The biggest purchaser of gilts has to be the UK pensions industry which is suddenly going to see Â£27.5 billion a year of contributions put at risk!
I am sure that a lot of people are going to be spending more time looking at the LibDem’s manifesto and that there will be more holes to find. More later.