The Budget must provide some protection for the striving class

Neil O'Brien of Policy Exchange wrote a cogent piece recently here about cutting back middle class welfare.  He welcomed, without qualification, the likely scaling-back of Child Tax Credit and, with a reservation, the possible means-testing of Child Benefit.

These rumoured changes should be considered in the context of other possible reforms and clear commitments.

According to the Coalition Agreement, the Government is committed to -

• Protecting those on low incomes from public sector pay constraint.
• An increase in personal allowances for "lower and middle income earners".
• A "significant" pupil premium for disadvantaged pupils.
• Reducing the Child Trust fund for higher earners.
• Taxing capital gains "at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities".
• An increase in "the proportion of tax revenue accounted for by environmental taxes".
• Introducing a new per flight duty.

Although the Agreement only refers very broadly to transferable tax allowances for married couples (Conservatives will vote for; Liberal Democrats will abstain), it's reasonable to presume that the restriction set out by the Party during the election will apply: namely, that the allowance is only transferable -

"So long as the higher-income member of the couple is a basic rate taxpayer".

(See here.)

Furthermore, the Agreement makes it clear that in reversing Labour's planned national insurance increases:

"Lower earners will get the greatest benefit as a percentage of their earnings".

It also says:

"We will prioritise [increasing the personal allowance to £10,000] over other tax cuts, including cuts to Inheritance Tax."

And the Agreement is silent about the future of the 50p top rate, of which the Conservative Manifesto declared that:

"We do not regard the 50p rate as permanent feature of the tax system".

Put all this together, and a picture begins to emerge.

During the months ahead, the middle class, as some call it, or the striving class, as others do, will be hit by:

• Higher prices, and upward pressure on mortgage rates;
• Higher taxes on car journeys and holidays abroad;
• Cuts in "middle class welfare" payments, such as the Child Trust Fund, the Child Tax Credit and Child Benefit;
• In some cases, the CGT rise;
• The withdrawal of the marriage tax allowance (if introduced) once the main earner hits the top income tax rate.

In addition:

• The Conservative commitment to cut inheritance tax has been shelved, as has -
• The more cautious Tory indication that the top rate would be cut.

And, in the meantime, poorer people will be protected against public sector pay conditions; their children will get a pupil premium; and they will gain disproportionately from tax cuts - as well as, of course, from the welfare state.

I accept that welfare should be targeted on the poorest and most vulnerable people in society, and that they should be protected from reductions in the rate of spending.

That David Cameron and George Osborne have plans to help them is a sign of the Party's renewed commitment to social justice - that it passes the decency test.

But one of the roots of Conservative belief is the conviction that the tax and benefit system shouldn't create disincentives to work and earn.

So given all the above, the question is inevitable: is the Budget set to worsen disincentives - and, furthermore, unfairly single out the striving class?

All in all, the Budget will clearly contain measures to protect the poor.  As I say, that's right.  But the striving class must also be given reason to believe that there's light at the end of the tunnel - and that a largely Conservative Government hasn't forgotten its natural supporters.

One means of doing so would be for the Chancellor formally to declare, for the first time, that the Coalition's committed to cutting the top rate of income tax as soon as possible.

Paul Goodman