Liberal Democrat junior coalition partners called for the government on Thursday to accelerate plans to exempt more low-paid workers from paying income tax, hoping to fund the move by taxing expensive homes and clamping down on tax evasion.
In a speech in London which may irritate some on the right wing of the Conservative-led coalition, Deputy Prime Minister Nick Clegg warned that household budgets are approaching a state of emergency, and the government needs a rapid response.
Chancellor George Osborne is expected to announce a further increase in the personal allowance for income tax in his March budget, but it is unclear whether he will be in a position to meet Clegg's costly challenge.
Britain's economy contracted in the last three months of 2011 and, with unemployment rising and wages stagnant, the government is facing greater pressure to soften its austerity plan of big spending cuts and tax rises.
Clegg's push for a smaller tax burden on the lowest paid, however, would be a fiscally-neutral move which he hopes can be funded by tackling tax avoidance by big companies and rich individuals, and a politically-controversial tax on expensive houses.
I want to help hard-pressed and hardworking families. If that means asking more from those at the top, so be it, Clegg, who also agrees in principle with extending income tax exemption for workers up to the level of Britain's minimum wage, said.
THE SQUEEZED MIDDLE
The coalition has committed to raising the threshold at which employees start paying tax to 10,000 pounds by 2015. That is a crucial pledge for the Liberal Democrats, who have had to abandon several policies since signing up to a coalition in 2010 which has damaged their popularity.
The personal allowance for income tax will rise in April to 8,105 pounds from the current 7,475 pounds for the year 2012/13, an increase which the Treasury estimates will cost about 1.2 billion pounds a year in lost revenue.
One estimate put the total cost of the allowance increase to 10,000 pounds at around nine billion pounds.
I want the coalition to go further and faster in delivering the full 10,000 pounds allowance because the pressure on family finances is reaching boiling point, Clegg said.
A source close to Clegg said the Liberal Democrat leader and party colleague Danny Alexander -- Chancellor George Osborne's number two at the Treasury -- will be pressing the case within government ahead of the March 21 annual budget.
The planned steady increase aimed at delivering the 10,000 pound personal allowance by 2015 just won't cut it any more, the source said.
Labour welcomed Clegg's efforts to ease the financial burden on low and middle income families, but accused the coalition of making it harder for such households during the economic malaise.
It is this government that has put up VAT, this government that is cutting tax credits and this government that is allowing energy companies to rip people off on their bills, Labour leader Ed Miliband said.
Even if the move receives a favourable hearing from the Conservative leadership, funding it in part with a so-called mansion tax on expensive homes is unlikely to meet with favour from the senior coalition party, raising questions about where the money would come from.
Despite fears that Britain is on the verge of another recession, the coalition has stood by its deficit reduction plan and insisted it will see through several years of austerity to get Britain's public finances back in balance.
A deteriorating economy, however, could mean more spending cuts and tax rises are needed to keep the government's plan on track.
Either way, any attempts to soften the impact of austerity on the poorer parts of society would need to be paid for through further spending cuts or tax rises elsewhere.
We cannot just cut taxes by raising borrowing -- that is just extra taxation deferred. And it would undermine our success in restoring stability and credibility to the public finances. So we need to find the money, Clegg said, urging instead those who are better off, or who act in ways that damage our environment to pay their fair share.
(Reporting by Matt Falloon)