George Osborne has one last chance to be truly radical

In what will probably be his last proper budget before the 2015 election, George Osborne should push through measures that will be virtually impossible for Labour to reverse, says Matthew Lynn.

In the spring of 2009, Alistair Darling made one of the most significant changes in British economic policy of the last decade. He broke the taboo on pushing up the top rate of income tax, increasing it to 50% for high-earners from the 40% that Margaret Thatcher's chancellor, Nigel Lawson, had set two decades earlier. Five years later, despite a Tory-led coalition, it is still at 45%, and shows little sign of coming back down.

In his heart of hearts, Darling probably knew he was presenting the last Labour budget for some time. His party leader Gordon Brown probably knew it as well. After three terms, the country was tired of the Labour Party, Brown had proved a catastrophic prime minister, and the financial crash of 2008 had exposed the hollowness of its economic strategy.

And yet between them, Brown and Darling did something very clever. By pushing up the top rate of tax and even more smartly delaying the introduction of the hike until 2010 they shaped the agenda for the next Conservative government. Some measures are incredibly difficult to reverse and that was one of them. No chancellor wants to be portrayed as cutting taxes for the rich, no matter how compelling the economic logic might be. It is terrible politics, especially at a time of austerity.

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Next week, when George Osborne presents what will probably be his last proper budget before the 2015 election, he should do something equally smart. He should push through measures that will be virtually impossible for Ed Miliband or Ed Balls to reverse. There is still a lot of campaigning to be done, but the reality is that the coalition is not going to remain in office after the 2015 election.

Labour is consistently ahead in the polls, and has been for the last three years. The bias in the electoral system means it does not need as high a percentage of the vote as the Tories to win the election 35% of the electorate should see it home.

Worse, Ukip has peeled away a big slice of the Conservative vote, and the Lib Dems are going to be pummelled. If David Cameron could not win a majority against Gordon Brown there is no reason to think he can against Miliband.

That means next week will be Osborne's last proper budget. Some measures are quite easy to reverse. Tax thresholds and allowances change every year, and are hard to follow. But a few headline numbers take on a symbolic importance, and can be very hard to change. The 50% top tax rate was one example. So, in the 1980s and 1990s, was the 40% top rate. The privatisations of the utilities, or the sale of council houses, were policies that future Labour governments found it impossible to repeal.

So far, Osborne has not done anything like that. He has reduced the growth of public spending, raised income tax thresholds, and made some reductions in corporate taxes. They are all perfectly worthwhile measures. But they will not be hard for Ed Balls to reverse if he gets to No. 11. There will be no huge political row if he freezes thresholds, andso lets them rise in real terms, or nudges corporation tax up by 1%. So what could Osborne do next week? Here are three good places to start.

First, raise the inheritance tax threshold to £1m. Property price inflation has made the current threshold of £325,000 ridiculous. Inheritance tax was meant to catch the genuinely wealthy, not ordinary people who happen to have bought their house and paid off the mortgage over many years. If £325,000 is split between three children, none of them are going to be troubling the Aston Martin dealers on the proceeds. If Osborne put it up to £1m, and forward-dated it to 2016, then Ed Balls would no doubt squirm and wriggle but he would find it too hard to reduce it again.

Second, slash corporation tax to 15% from 21%. Ireland in the 1990s showed the power of a super-competitive corporate tax rate to attract investment. With the eurozone economy still weak, why not drive home that advantage by making the UK the most tax-friendly destination in Europe? Miliband is riding high on anti-business rhetoric, but even he would baulk at doubling the rate of corporation tax. If the cut was phased in over three years, it would stick.

Finally, merge tax and national insurance. NI has stopped having any meaningful connection to the benefits you receive. But it provides a useful cover for Labour chancellors to smuggle through tax rises without owning up to them. Merge the two taxes into a single, combined rate, and that would be impossible. If Balls wanted to raise taxes, he would then have to stand up and say so and face the electoral consequences.

Osborne has not been a radical, reforming Tory chancellor so far. He has mostly tinkered with the policies that Gordon Brown left behind. But he is a very strategic politician, constantly working out electoral advantages. His party will probably lose the election but if he gets next week's budget right, he could make sure he's still influencing the way the economy is run up to 2020 and even beyond. And if nothing else, he would at least annoy Ed Balls.

Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.