Ian McConnell: Davis took wrong Brexit path but he is right on Budget pension raid

We should remember Mr Davis’s clamour for a hard and (as confirmed by the forecasts drawn up by former prime minister Theresa May’s government) very economically damaging, as well as socially divisive, Brexit. And we should also bear in mind his general inclination, albeit in line with the lamentable and miserable ideology of recent Conservative administrations, to vote to cut and limit welfare benefits.

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Until about a couple of weeks ago, there was a lot of noise about how the Conservatives might, in the March 11 Budget, restrict tax relief on pension contributions to the basic rate (of 20%).

This would be a huge revenue earner for the Tories, with some estimates putting the amount that could be raised at about £10 billion a year.

Just to give an idea of the scale of this, it would eclipse the £2.5bn raised annually, based on estimates at the time of the March 2011 Budget, from the abolition of universal child benefit championed by some Liberal Democrats and delivered by their party’s coalition with the Tories. The brunt of this cut to child benefit, which took effect from January 2013, has been borne by middle earners, with the move having resulted in an eye-watering effective marginal tax rate for people in the child benefit taper band between £50,000 and £60,000.

Of course, people on incomes above this level are also affected by the abolition of universal child benefit but the relative effect becomes less as incomes move higher.

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There is no doubt that new Conservative Chancellor Rishi Sunak, who seemed to relish the opportunity to succeed Sajid Javid after his predecessor’s departure was apparently triggered by a rift with Boris Johnson adviser Dominic Cummings, could do with raising some big money.

The UK economy’s performance has been dismal under the Tories. And the Conservatives’ failure on this front is writ large in the public finances.

Public sector net debt has soared from around £1 trillion in 2010, when the Tories came to power, to more than £1.8 trillion. Many people could be forgiven for not having realised this, given the Conservatives’ messaging about being prudent guardians of the public finances.

However, given the pensions timebomb that has been developing and the fact that it would in reality generally be middle and not high earners who would really feel the impact of restricting income tax relief on contributions, this would not be the right place for him to seek money.

Middle earners have felt a much greater squeeze than the richest in society under the Conservatives (and their previous coalition with the LibDems), in terms of the child-benefit changes, value-added tax hikes and the likes of university tuition fees south of the Border.

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The middle-income bracket is a large one in terms of numbers of people and can thus yield significant revenue if it is targeted.

You might hope money raised in this way would be used to alleviate the woes of the worst off in society and this type of redistribution is surely morally right, particularly in times of crisis. Knowledge that such redistribution was occurring might also ease the pain for those middle earners with a conscience who saw what was being taken from them was being used for the greater good (although this would obviously be less important than the redistribution).

However, this is absolutely not what has happened under the Tories, who have raided the finances of those on the lowest incomes with savage welfare cuts and hikes in VAT.

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Big companies have benefited from huge cuts in corporation tax but this has not triggered the hoped-for investment that might have helped boost the flagging economy. We are still waiting for the “march of the makers” promised by former Tory chancellor George Osborne in his March 2011 Budget.

The Scottish Government has raised the burden on middle earners by holding down the higher-rate threshold for income tax but at least this has been done to pursue more socially desirable policies.

It has to be said that the likes of the refusal by the Greens to countenance indexation of the higher-rate threshold in line with inflation, applied to high-profile effect in 2017, has looked mean and dragged ever-more taxpayers into the bracket. However, these niggles aside, the general attempt in Scotland to tweak the tax system to help those people who are worst off is commendable. And it has been done in a way that has been sensible enough not to scare off businesses, or lead to an exodus of people in pursuit of lower taxes south of the Border. Going forward, it will be crucial to ensure this balance is maintained.

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In 2012, the Conservatives unveiled a cut in the top rate of income tax, for people who are undoubtedly high earners on more than £150,000 annually, from 50% to 45%.

And it has undoubtedly been toughest, most unjustly, for those on the lowest incomes under the Tories. These people have paid a high price for a global financial crisis they had nothing to do with.

It would have been nice if big companies and the highest earners, to use a phrase touted by former prime minister David Cameron, had been more “in this together”.

But Mr Sunak should recognise, if he is still weighing the pension tax relief question, that middle earners look to have paid at least a fair share in the grim period since the global financial crisis.

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It does appear that plans to cut back on pension tax relief may have been scrapped, although you can generally not be entirely sure of what will happen until chancellors get to their feet.

Such a raid on pensions would, if it were actually pursued, seem likely to prove a Tory own goal, reminiscent of the very short-lived plan to raise national insurance for the self-employed, abandoned by former chancellor Philip Hammond just days after it was announced back in 2017. It would be a major hit for traditional Conservative voters (as well as millions of others).

The trouble for Mr Sunak is that the Conservatives have made big noises about infrastructure projects.

These are not a bad idea in themselves – especially given the Brexit-induced weakness of the UK economy and what is to come on this front, as well as the hopefully more temporary COVID-19 coronavirus effect. Infrastructure spending by the Scottish Government helped support the economy north of the Border in the wake of the global financial crisis.

The Tories would also seem likely to be aware of the UK economy’s urgent need for other stimulatory measures. They might also perhaps feel compelled to do things to appeal to those traditional Labour voters in the likes of the north of England who love Brexit and delivered Mr Johnson his big election majority in December.

The problem for the Conservatives is they have already raided the places you would expect them to go first, such as welfare, although it is crucial to recognise in this regard that this was never, ever where they should have been going anyway to raise money. These moves and the VAT hike have had a major counter-productive effect.

So the Tories now face a real conundrum.

Fuel duty has been mentioned as a possible target and this could be a big revenue-raiser but it would probably not be popular with traditional Tory voters.

The Conservatives could highlight the climate-change agenda but this might not cushion the blow much for motorists.

The Tories look to be in a jam but, given they have overseen a huge deterioration in the public finances without much criticism, we should not underestimate their ability to spin their way out of their latest troubles in these ideologically driven days.