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Osborne wanted top rate of income tax cut to 40p but Clegg said no and it may now be 45p for many years to come

By Tim Montgomerie
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Osborne at desk

The Quad hadn't dotted the i's and crossed the t's but one week before the Budget George Osborne thought he had agreement to cut the top rate of income tax from 50p to 40p. Something happened, however, in the few days running up to the Budget that meant the Chancellor could only cut the top rate by 5p to 45p.

I haven't been able to establish the precise timing but perhaps as close to 48 hours before Mr Osborne was due to walk out of Number 11 Downing Street, holding his famous red box, Nick Clegg went to David Cameron and said he couldn't and wouldn't support a cut to 40p. It was one of the first times in their seven year partnership that George Osborne wasn't at the table when a massive decision was taken. Worse for the man who is often rightly seen as co-leader of the Tory Party it was a decision that affected his own Treasury brief and was central to his growth strategy.

Cutting 50p was always going to be controversial and commentators like Ian Birrell had made strong arguments that it was too risky and would retoxify the Tory brand. Tory MPs like Martin Vickers have since complained that the tax change reinforced the perception that the Conservative Party favoured the rich and therefore contributed to the local election setbacks in May. The 50p decision certainly seemed to precipitate the rocky events that have become Cameron's worst period as leader.

George Osborne was aware of the political risks but felt that abolishing the 50p rate was the best signal he could send to the world's risk-takers and entrepreneurs that Britain was open for business. Like 82% of Tory members he also thought that if you are going to cut the top rate and take the inevitable political flak then it should be done quickly and a full cut to 40p would deliver the maximum economic benefit.

Although the Chancellor was over-ruled he has publicly defended a cut that he privately argued was a fudge and half-measure. He had argued his case long and hard behind-the-scenes but had had to accept that the HMRC's own Laffer curve analysis - that became available one week before the Budget - suggested that 45p was, perhaps, the revenue-maximising rate. Osborne argued that the economic impact of the top rate of tax should not be confined to revenue considerations but Clegg was insistent. It had to be 45p and it may now be 45p for many years to come.


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