Tories' 'no tax rise' pledge means no relief from austerity

David Cameron surprised Labour and stunned his own side by promising legislation which will ban Chancellor George Osborne from raising VAT, income tax or national insurance contributions for five years if the Tories win next Thursday’s general election.

The legislation is unprecedented because it will severely restrict the Chancellor’s freedom to balance the books in future.

Market analysts including Chris Williamson, chief economist at Markit, said it would leave Osborne with only one economic lever if the public finances turned out to be wrong - deeper cuts in welfare. Ed Balls, the shadow chancellor, dismissed it is as a “ridiculous gimmick”.

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Aides are briefing that Cameron’s pledge is intended to sharpen the choice between the Tories - who promise tax cuts - and Labour who, according to the Tory mantra, put taxes up.

Cameron will say: “This is the clearest choice on the economy for a generation. And beyond the plain facts, it also comes down to gut instinct. When you’re standing in the polling booth, ask yourself: on the things that matter in your life, who do you really trust?

“When it comes to your tax bill: do you trust the people who taxed you to the hilt when they were in power and still haven’t come clean about the taxes they want to increase next time round? Or do you trust the Conservatives, who have cut income taxes for 26 million people, and who will cut your taxes again next time?”

But that is not the whole story, of course. Cameron clearly believes that only legislation will restore the trust of the electorate in politicians, because mere promises are so easily broken. Cameron and Osborne promised before the last election not to raise VAT or cut tax credits - and did both.

Ed Miliband will claim that Cameron’s pledge makes it more likely the Tories will have to slash tax credits by as much as £3.8bn as part of their plan to reduce the overall welfare bill by £12bn.

This, the Labour leader will say, could leave families with two children up to £2,000 worse off. He will also restate Labour’s policy to increase tax credits at least in line with inflation every year in the next Parliament.

With economists warning of the difficulties George Osborne would face in cutting the deficit with one hand tied behind his back, the shadow chancellor, Ed Balls, had a field day on Radio 4’s Today programme this morning.

“It wasn’t in the Conservative manifesto three weeks ago,” said Balls. “The Conservatives have obviously decided on this last- minute gimmick because they are losing the argument.”

He pointed out that William Hague, representing the government on the same programme earlier, had refused to rule out the Tories cutting child benefit or tax credits. “It’s a ridiculous gimmick,” said Balls.

He was given further ammunition with which to attack the Tories by yesterday’s uninspiring figures showing growth had halved to 0.3 per cent in the first quarter. Balls could not resist saying: “I told you so”.

He was less comfortable when challenged over how he would pay for his pledge to get the UK budget into surplus by the end of the five-year Parliament if Labour win on 7 May.

“Where’s the money coming from?” asked John Humphrys.

“Growth and better jobs,” said Balls. “Unless you have a plan for growth, we cannot get the deficit down.”

Yes, but how good a plan can Balls come up with?

Martin Wolf of the Financial Times argues that Britain should be less concerned about paying off the deficit – “Why should one be desperate to avoid a free loan?” – and more ready to borrow to promote growth.

The recent claim by George Osborne that Britain might be the most prosperous major economy in the world by 2030 is “fantasy” says Wolf. “The risk, instead, is that it is going to fall further behind. Furthermore, the imbalances in the economy are going to make future growth more difficult and less sustainable.”

In the next parliament, Wolf argues, “the fundamental economic necessity is to find policies and programmes able to produce a better-balanced and more dynamic economy. These are the challenges against which the parties’ programmes must be measured — and will be found wanting.”

The Nobel Prize-winning economist Paul Krugman is also unimpressed. With the Tories, Labour and the Lib Dems are all committed to deficit reduction, Krugman tells The Guardian that Britain seems "stuck on obsessions that have been mainly laughed out of the discourse elsewhere".