Tories panic with tax cut pledge

March 29, 2010

NeilCollinsNeil Collins is a Reuters columnist. The views expressed are his own

National Insurance contributions make an unlikely battleground for the British election. They lack the sexiness of income tax cuts. But NI is a bad tax and the Tories are right to pledge to overturn Labour’s plan to raise it.

Unfortunately, their timing smacks of desperation as their poll lead melts away. More to the point, it flies in the face of their commitment to cut Britain’s vast budget deficit.

NI provides a strong incentive to employers to make do with fewer workers. It has long since ceased to provide any insurance, and is a second income tax, with different regulations and exemptions, in all but name. Labour proposes to raise the rate by 2 percent to 25.8 percent next year, with 12 percent from the employee and 13.8 from the employer.

As a result, the state would take 40 pounds of every 100 pounds an employee (on the basic 20 percent rate of income tax) costs his employer. The figure for higher-rate taxpayers is 49 percent, and for top-rate payers, 58 percent.

Unsurprisingly, NI is a powerful revenue raiser. The Treasury projects that the 2 percent increase is worth 7 billion pounds after raising the threshold for the worst-paid workers.

Even after this thumping tax rise, the Centre for Economics and Business Research reckons a further 35 billion pounds of spending cuts and tax rises are needed to hit Labour’s own borrowing target by 2014-15. These are such big numbers that neither party has dared reveal details of what they will do, even though nearly everyone else sees drastic action as inevitable.

The Tories’ attack had concentrated on claims that they would shrink the deficit faster than Labour. The new policy gap on NI may improve the chances of a proper debate between the parties’ finance chiefs on Monday night, but it will not help the Tories’ credibility.

The last time that George Osborne, the shadow Chancellor, pulled a tax rabbit out of the hat, it upset Labour so much that Gordon Brown funked calling an election. This time, the public is more likely to smell a rat.

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