The 10p tax row was a political row that raged within the British Labour Party during the course of 2008 and did much to undermine the popularity and credibility of Gordon Brown's Labour government.
To understand the 10p Tax Row we need to go back to the 21st March 2007 when Gordon Brown made what was to be his final budget speech as the Chancellor of the Exchequer. With the benefit with hindsight, it is possible to see that Brown's general view of the future course of the British economy was somewhat mistaken. His predictions that inflation would fall to 2% in 2008 and carry on falling, and that the economy was set to grow between 2.5% and 3% over the next two years, would only induce ridicule if repeated today, whilst it would also be possible to credit David Cameron with a great deal more foresight than he likely possessed when he said that Brown was in "a deep hole".
What however concerns us here is the changes Gordon Brown proposed to make to the arrangements for income tax as, in a suitably dramatic flourish at the end of his speech; Brown announced that he was cutting the basic rate of income tax from 22% to 20%; an announcement that was naturally greeted with loud Labour cheers. Although it is possible that the Labour cheers might have been slightly muted had they fully realised that this cut was being financed by the abolition of the 10p rate.
For those unfamiliar with the British Income Tax System it would be necessary to explain that for the tax year ended the 5th April 2008, individuals paid no tax on the first £5,225 of their income, then paid tax at a lower rate of 10% on the next slice of £2,230 of income, following which they paid tax at the standard or basic rate of 22%, with a higher rate of 40% then being paid on any income over £34,600. This lower rate of 10% had a certain iconic significance for many, as in its manifesto for the General Election of 1997; the Labour Party had proclaimed that its "long-term objective" was "a lower starting rate of income tax of ten pence in the pound" as part of its overall commitment to "Fair taxes". Despite this commitment however, everyone had to wait until the 1999 Budget before Chancellor Brown felt able to introduce the 10p rate, which initially applied to the first £1,500 worth of taxable income and even then simply replaced the previous 20p lower tax band which applied for the first £4,300 of taxable income.
Now of course, paying tax at 10% rather than 20% on £2,230 was only worth some £240 a year, but to many part-time workers and those on or just above the minimum wage it meant an extra £20 a month in their pay packets, for which they were no doubt very grateful. They were rather forgotten about in the initial euphoria induced within the ranks of the Labour Party by Brown's cut in the basic rate of income tax; although the plain fact was that anyone earning less than around £18,500 would be paying more tax.
There is the question of what Tony Blair thought of this idea, since he was at least nominally the Prime Minister at the time. There is a school of thought that says that it was all just as much a surprise to Blair as it was to everybody else, and that "his grin froze in horror" when he heard Brown deliver his speech in the chamber, and that he later returned to Downing Street to complain that the Budget was a disaster that "played into all the worst perceptions of Gordon". However according to The Guardian journalist Martin Kettle, Brown had in fact previously told Blair that only about 25,000 people would be affected by his decision to abolish the 10 pence tax band, and that Blair accepted this explanation. In the scenario outlined by Kettle "it appears fairly clear that Brown gave Blair false information", and according to Kettle his information was that "Blair thinks this is the case". However the Daily Telegraph was equally adamant that they had spoken to a "former Downing Street insider" who told them that whilst "Tony was uncomfortable about" the whole thing, he simply "didn't have the appetite to force Gordon to back down", and took the pragmatic view that it would be Brown's "problem to deal with".
Indeed it is worth remembering that whilst Brown might have been Chancellor at the time, he certainly expected to be Prime Minister within a matter of months. As we now know he was indeed crowned Prime Minister in June 2007 and so it did indeed become entirely his problem to deal with. With Brown in charge it soon became clear that Plan A was to hold a General Election soon afterwards, in order to ensure four more glorious years of Brown's leadership, and that Brown intended to go to the country with the proud boast that he had reduced the standard rate of income tax to 20%. Indeed the Daily Telegraph found a suitability anonymous "government minister" who told them that "Gordon wanted to show that he could do what Margaret Thatcher never did and bring the basic rate of income tax down to 20 pence" and described it all as a "blatant piece of political manoeuvring".
It was no doubt the imminent prospect of an autumn General Election that explained why criticism of the proposals was somewhat muted from the Labour ranks. However, the one thing that Labour MPs could not claim was that they were ignorant of the true state of affairs, as within hours of the budget speech the Institute for Fiscal Studies came forward to present their analysis of the changes to taxes and benefits announced by Chancellor Brown, and concluded that something like three million taxpayers would in fact be adversely affected. Indeed, during the subsequent debates on the Finance Bill there were plenty of Liberal Democrat and liberally inclined Conservative members prepared to challenge the government over the true effect of the tax changes. Menzies Campbell went so far as to claim that Brown had "asked the poor to subsidise the rich" and that he was only interested in "his own political succession". However on the Labour benches only Frank Field and a handful of others were prepared to voice their concerns.
Indeed it was Frank Field, together with the Liberal Democrats Vince Cable and Julia Goldsworthy, who tabled an amendment to the Finance Bill 2007 that would have required a compensation package for those who would be worse off under the new tax rates. Although the Conservative Party thought about supporting the amendment, in the end they decided to abstain as they were "concerned how it would work in practice were it actually to be written into legislation", and so when the vote was taken on the 25th June 2007 the amendment was lost by 269 votes to 67. Amongst those who supported the amendment were the Liberal Democrats, seven Labour rebels, Plaid Cymru, the Scottish National Party and one solitary Conservative named Robert Spink who was later to announce his defection to the United Kingdom Independence Party. Of course, given the state of the parliamentary arithmetic, it would not have made any difference had the Conservatives decided to support the amendment, since seven Labour rebels were not enough to shake the government's majority.
As a result the new tax rates duly come into force on the 6th April 2008, and all appeared well within the Labour Party.
Of course, two days after Frank Field's amendment failed in the Commons, Gordon Brown finally achieved his lifetime ambition and became Prime Minister of the United Kingdom of Great Britain and Northern Ireland on the 27th June 2007. Over the next few months the nation experienced the Brown Bounce (mark 1), as the Labour Party surged ahead in the opinion polls, and it seemed as if Brown was on course for victory in an autumn General Election. Of course there was no election, as Brown rather lost his nerve at the last moment and it became the election that never was. Shortly afterwards the nation's mood changed as the Conservative Party surged ahead in the opinion polls.
The mood within the Labour Party also changed as many began to consider the possibility that the tax changes were at least partially responsible for the change in public sentiment. It was during the weekly meeting of the Parliamentary Labour Party held on Monday, the 31st March 2008, that one backbencher named Eric Martlew expressed his concern over the abolishment of the 10p tax band. In response Gordon Brown simply denied that there was any problem, and told his colleagues that "there aren't any losers". Then on the 17th April the news broke that Angela Christine Smith, Parliamentary Private Secretary to Yvette Cooper, Chief Secretary to the Treasury, was going to resign over the issue. However on the following day Ms Smith announced that she wasn't going to resign after all, although she did claim to have "concerns over tax changes" and these had been "discussed with senior government figures", despite having earlier dutifully voted against the amendment proposed by Frank Field back in June 2007. Further embarrassment befell the government when it emerged that Brown, who was in the United States at the time, had been forced to interrupt his talks with George W. Bush, and ask for a telephone with an outside line so that he could phone Smith and persuade her to change her mind.
However despite Ms Smith's change of heart, the press began reporting on the rumours that up to seventy Labour MPs, including Frank Field and David Blunkett, were now calling on the government to reconsider. Asked about such rumours on the 20th April Brown was dismissive of the reports and claimed that it was all "just one or two MPs asking questions". Then on the 22nd April Frank Field tabled a new amendment to the latest Finance Bill which eventually attracted the signature of forty-six Labour backbenchers. Apart from the fact that forty-six was a lot more than "just one or two", what was more significant was that that forty-six was a lot more than seven and was sufficient to remove the government's majority.
Faced with a Commons revolt scheduled to take place only three days before the local elections, on the following day Alistair Darling wrote a letter to John McFall, the chairman of the Commons Treasury committee, in which he announced a package of concessions, including changes to the winter fuel payment system, tax credits and the minimum wage which were designed to at least partly compensate some of those who had lost out due to the tax changes.
However, although these proposals were sufficient to persuade Frank Field to abandon his threatened revolt just minutes before Prime Minister's Questions were due to start, they nevertheless left the government in the position of having to perform an embarrassing U-turn to head off a threatened backbench revolt. In the circumstances both David Cameron and Nick Clegg had a fine old time poking fun at poor Gordon Brown during Prime Minister's Questions. Cameron claimed that the Prime Minister had suffered a "massive loss of authority" whilst Clegg called Brown an "increasingly pointless Prime Minister".
All this was of course simply a gift to the Conservative Party who were duly victorious at both the Local Elections and the London Mayoral Election held on the 1st May, whilst Cameron proclaimed that the upcoming Crewe and Nantwich by-election would be a referendum on the government's "tax-con budget". In the aftermath of these electoral setbacks, and with a by-election in prospect the government felt obliged to announce a further compensation package, although when pressed to provide details regarding the package, "Treasury sources" would only say that they "were still being worked out" and that "all options were being considered".
On the 13th May that Chancellor Alistair Darling eventually announced that the government would now increase personal tax allowance for the current tax year by £600, thereby giving all twenty-two million basic rate taxpayers a £120 tax cut, although threshold at which the 40% rate kicked in would be lowered so that higher earners' tax bills would be unchanged. The Daily Mirror greeted the news of this "surprise mini budget" with the headline 'Fightback starts here'. Other less pro-Labour publications took a slightly different view, and ran headlines such as 'The Bribe Minister', 'Brown's Tax Bung', 'The Darling bungs of May' and 'Darling buys way out of trouble'. "Crude, simple and costly" was how The Guardian described it, although the Daily Telegraph was more supportive, as it had devoted a leader a few days previously, proposing that exact same solution to the problem and was therefore pleased that the government appeared to be following their advice.
Of course the government didn't actually have £2.7 billion to hand back to taxpayers in this manner; it was simply going to borrow the money, and as it turned out none of this appeared to have made much difference to the voters of Crewe and Nantwich, as the government duly lost the by-election held on the 22nd May 2008 by a considerable margin.
Whilst the government might well have lost the Crewe and Nantwich by-election, it certainly appeared that Darling's tax giveaway had succeeded in keeping the Labour rebels quiet. Until that is the House of Commons Treasury Select Committee issued a report on the 28th June 2008, which stated that the cost of the £2.7 billion represented money that had not been "well-targeted", since £2 billion would be going to taxpayers who hadn't lost out in the first place, while there were still 1.1 million taxpayers left who remained worse off. The report further added that the "government must not let this issue slide into the background and will need to produce fresh proposals to fully compensate these 1.1 million households by the time of the 2008 pre-Budget report".
The Finance Bill 2008 was due to appear before the Commons on the 1st July and so emboldened by their previous success, the Labour rebels decided to strike again. Lynne Jones, the Labour member for Birmingham Selly Oak, put forward an amendment which proposed that tax payers be given a choice over whether to opt in or out of the 10p rate, whilst another amendment tabled by David Taylor, the Labour member for North-West Leicestershire, and signed by fifteen Labour backbenchers, which proposed bringing in a taper mechanism into the £600 increase in personal allowance.
Although the government had previously indicated that "no further changes are planned to income tax arrangements for this financial year", Darling was soon running around claiming that the whole matter would be looked at again in his autumn pre-Budget statement. This turned out to be sufficient to head off the rebels and persuade them to wait until the autumn when yet another compensation package was expected. In the pre-Budget report of November 2008 Darling therefore felt obliged to announce that the £600 rise in the tax threshold would be "permanent", (not that anyone had ever thought that the government would reverse this tax giveaway so soon anyway, given that there was a General Election on the way) and also announced that he would be increasing it by a further £130 from April 2009. However even he admitted that this still left some half a million taxpayers who were worse off, which left Frank Field to warn the Chancellor that the problem was "still not fully resolved".
The row might have rumbled on except for the fact that by this time the world had changed. What had once appeared to be a problem with a handful of banks that seemed to have been managed on a slightly less conservative basis than their peers had turned into a Global Banking Crisis where every bank in the country was at risk of falling into the pit of doom. In such circumstances everyone quite forgot about the 10p tax row and the half a million or so of taxpayers that remained worse off and started worrying about the fact that everybody would soon be a lot worse off.
The significance of the 10p tax row was that the Labour Party had been elected to government on the basis that it would bring in a 10p tax rate as part of its long term commitment to fairer taxes. It's rapid abandonment by Brown smacked of realpolitik and was regarded by many as a betrayal of some fundamental principle.
But the more damaging consequence of the whole 10p tax row was that Gordon Brown gave every impression that his government was simply making up policy as it went along and, generally speaking, people prefer governments who at least appear to know what they're doing, (even if they don't like what they're doing) and disapprove of governments who appear to be at the mercy of other forces. It became one of the major factors that caused a collapse in support for Gordon Brown's administration during the first half of 2008.
It was a political masterstroke that worked for, oh, about 45 minutes.
(Daniel Finkelstein)
SOURCES
- Income tax — Assessment of changes across earnings groups — rejected — 25 Jun 2007
http://www.publicwhip.org.uk/division.php?date=2007-06-25&number=151&display=allpossible
- Timeline: 10p tax row
http://www.guardian.co.uk/politics/2008/may/13/economy.labour
- Martin Kettle, The 10p crisis's biggest loser, The Guardian, 21 April 2008
http://www.guardian.co.uk/commentisfree/2008/apr/21/the10pcrisissbiggestloser
- James Kirkup and Robert Winnett, Labour 10p tax rebels set end-of-week deadline for Gordon Brown, Daily Telegraph, 30 Apr 2008
http://www.telegraph.co.uk/news/uknews/1898400/Labour-10p-tax-rebels-set-end-of-week-deadline-for-Gordon-Brown.html
- Andrew Porter, Labour: Alistair Darling gives 20 million a tax windfall in emergency budget Daily Telegraph, 14/05/2008
http://www.telegraph.co.uk/news/newstopics/politics/labour/1953465/Labour-Alistair-Darling-gives-20-million-a-tax-windfall-in-emergency-budget.html
- Francis Elliott and Philip Webster, Rebel backbencher Eric Martlew has his day after five weeks of panic, The Times, May 14, 2008
www.timesonline.co.uk/tol/news/politics/article3927267.ece
- James Kirkup, Pre-Budget report: 10p tax losers still not fully repaid by Chancellor Alistair Darling, 24 Nov 2008
http://www.telegraph.co.uk/finance/financetopics/budget/3514708/Pre-Budget-report-10p-tax-losers-still-not-fully-repaid-by-Chancellor-Alistair-Darling.html