Osborne Seeks to End 50% Tax Spat With Pledge to Aid U.K. Poor

Chancellor of the Exchequer George Osborne sought to calm speculation over whether he will scrap Britain’s top income-tax rate by promising to use his budget this week to help lower-income workers.

Pledging “extremely aggressive” measures to stop tax evasion, particularly on property transactions, Osborne said yesterday that the March 21 annual budget will include changes “for lifting low-income people out of tax.” He said a decision was made last week on whether to cut or abolish the 50 percent tax rate on earnings above 150,000 pounds ($238,000), without saying what it was.

“The bulk of the measures are directed at working people on low and middle incomes,” Osborne told BBC television in an interview. Matters of substance were agreed on last week, leaving a meeting today only to “discuss how we will present the budget.”

The comments suggest Osborne’s Conservative Party may have won the backing of the minority Liberal Democrats in the coalition government to scrap the top tax rate in return for support for the less well-off. Osborne’s repeated insistence on a budget with no extra borrowing suggests that anti-avoidance measures will finance both tax cuts.

The opposition Labour Party attacked the possibility of a tax cut for the richest, saying help for high earners should not be a priority when Osborne is driving through the biggest public spending cuts since World War II as he seeks to reduce the second-highest budget deficit among Group of Seven nations.

‘Out of Touch’

“For families on middle and low incomes, seeing their petrol prices up, their fuel bills up, their living standards squeezed, the idea that George Osborne is saying the No. 1 priority is to cut taxes for those on 150,000 pounds, they can’t be serious,” Ed Balls, Osborne’s opposite in Parliament, told the same BBC program. “It’s totally out of touch.”

Any tax cut would be financed by a crackdown on the “completely unacceptable” practice of buying homes through a company to avoid paying stamp duty, rising to 5 percent of the price of homes over 1 million pounds, Osborne said. People who game the system will face “a very punitive charge,” he said.

“We are going to come down on that practice like a ton of bricks,” Osborne said. “People have had their warning.”

Tax Avoidance

In addition to the stamp-duty measures, Osborne will also say he plans to introduce legislation for a General Anti-Abuse Rule in next year’s Finance Bill, according to person with knowledge of the matter.

The aim of such a rule is to prevent “aggressive” tax avoidance by individuals and companies such as Barclays Plc, which was asked last month were asked to end a practice that would have deprived the public purse of more than 500 million pounds. New rules would deter abusive behavior and give the tax agency greater powers to stop it when it takes place, said the person, who declined to be identified because the plans aren’t public.

Osborne is constrained by his desire to keep Britain’s AAA credit rating, and he told ministers during budget negotiations that he will not borrow more money to finance tax cuts. Earlier this month, Fitch Ratings added to previous warnings from Moody’s Investors Service that Britain’s top-grade credit hallmark carries a more than 50 percent chance of a downgrade over the next two years.

Austerity Program

The Treasury prolonged austerity plans in November beyond the 2015 election, with an extra 15 billion pounds of spending cuts from then to eat into the extra 158 billion pounds of borrowing needed because of weaker-than-expected economic growth.

The chancellor’s previous budget cuts will see more than 700,000 public-sector jobs axed in the tightest fiscal squeeze since World War II. He wants to erase by 2017 the bulk of a budget deficit that equals 9 percent of gross domestic product.

Osborne said any decision on the 50 percent tax rate will be based on a study by the Revenue and Customs department into how much it is raising for the Treasury. Liberal Democrats such as Business Secretary Vince Cable have signaled their willingness to relent on the issue in return for lifting the tax-free allowance at the bottom of the income scale.

Critics of the 50 percent rate, such as London Mayor Boris Johnson, a Tory, argue it is a disincentive to entrepreneurs, encourages tax evasion and risks diverting investment abroad. The levy was introduced by the previous Labour government to cut the budget deficit and left Britain with a higher marginal tax rate than in the U.S., Germany and France.

‘Mansion Tax’

The Liberal Democrats say their priority is to take more low-income households out paying tax altogether. Cable said on March 6 the party is willing to scrap the top tax rate as long as the Conservatives agreed to introduce new taxes on the wealthy.

Cable said he favored a tax on property, known as a “mansion tax,” which could be levied by local government and become part of the existing council tax or be raised directly by central government.

The next day, Cable attacked a lack of “compelling vision” in the government, saying efforts to narrow the budget deficit don’t amount to an economic plan for the future. Deputy Prime Minister Nick Clegg, the Liberal Democrat leader, has called for a “tycoon tax” on high earners, without giving details.

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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