New 45p rate will be kept under review, ministers are told, as chancellor denies blame for leaking budget details
George Osborne refused to rule out a further cut in the top rate of tax and said he was considering changing the way the Treasury assesses the likely impact of tax cuts.
Giving evidence to the Treasury select committee on the budget, the chancellor said he was interested in introducing dynamic modelling of projected tax changes. The change would make it easier for the Treasury to argue that a tax cut was likely to lead to a smaller loss of revenue than the current model would.
In the Treasury red book, the cost of cutting the top rate to 45p is £3bn in the first year, rising to £4bn by 2016-17. But the Treasury said the direct impact of households working harder and bringing more cash into the Exchequer meant the net cost falls to just £100m due to extra revenue from wealthier people working harder and bringing their incomes onshore.
A further indirect impact through increased VAT income would mean the 45p rate increases tax income overall.
Osborne insisted Treasury officials and their special advisers had not been behind any market-sensitive leaks of specific changes in tax rates before last Wednesday's budget statement.
The chancellor said: "What I can confirm is that no Treasury official, minister or spokesperson briefed before the budget any specific information on tax rates or tax allowances."
He admitted a story reported in the Guardian on 100-year gilt bonds was leaked, but it was not a "budget story".
"That was leaked to the press, but that wasn't a budget day measure. There is a concern about things like rates of income tax and tax allowances and the like, but the fact the debt management office will consult in the future on gilt secretaries is not a budget issue. I am concerned about things that pertain to the classic issue of a budget."
It is reported he hit the roof while in America when it was revealed, also in the Guardian, that he planned to cut the top rate of income tax. He claimed two factors had led to the leaks. "The first is that I have to agree my budget measures well over a week in advance with the Office for Budget Responsibility. By the Friday before, I have to confirm everything. No chancellor has done that before."
He added: "I also have to negotiate a coalition. The process is very different, and I have to engage two political parties and get their consent to proceed. This is not pointing the finger, but is to say many more people know in a coalition what is going to be in the budget. I don't know where these stories come from and I would rather they hadn't appeared."
Sir Nicholas Macpherson, the permanent secretary to the Treasury, said he was satisfied no one in the Treasury had leaked tax rates.
Discussing whether he was willing to cut the top tax rate to a lower figure before the election, he said he had not assigned the 45p rate a special status.
"The 50p rate was assigned a special status by my predecessor and by me of being temporary. I don't assign a special status to the 45p rate. It is now like all other tax rates – something we keep under review," he said. "There was something particularly damaging about having a 50p rate of tax. I don't think that applies to a 45p rate of tax. I think we now have a competitive top rate of tax."
He said he had considered a proposal by Nick Clegg, the deputy prime minister, for a minimum rate of tax – dubbed the "tycoon tax"– but said it would have been difficult to enforce.
Instead, he had chosen to cap unlimited tax reliefs which enabled some wealthy people to escape income tax altogether. He highlighted a "stylised" example drawn up by HM Revenue and Customs.
"An individual can have an income of £10m, and under the tax system I inherited claims loss relief for £5m, charitable relief of £4m, and qualifying loan interest of £1 million," he said.
"Their average income tax rate for the year is therefore 0%. They therefore of course pay no income tax whatsoever.
"I think it is very difficult to justify 0% tax rates for some of the wealthiest people in this country."
Osborne also defended his "granny tax" saying: "We are doing in this in way that will simplify the tax system. We are doing it in a way where there are no cash losers. We are also doing it at a time when we are rapidly increasing the personal allowance."