Cut VAT and you help the poorest and give the economy a boost, surely a no-brainer, writes Brian Monteith
This week we shall learn the details of the first Conservative Budget for 18 years. George Osborne has delivered six Budgets so far but for all of them he had the Liberal Democrats sitting on his shoulder, this time he is on his own.
We can therefore expect some taxes to be cut, new allowances to be introduced and anomalies (even those of his own making) to be undone. Standard stuff for any chancellor really, the interest will be focused on how, if at all, his changes can drive economic growth deep and faster than he could when playing tag-team with Danny Alexander.
At least the Conservatives have a general approach that is consistent and marketable. They espouse the general theme that because money belongs to taxpayers until it is taken from them by the force of law, tax rates should be as low as possible and spent prudently. Even though they don’t always hold to these principles as assiduously as some wish (I have a long list) it is a good place to start from. The key point is that although the Conservatives occasionally deviate from their default position as tax cutters they will give reasons for this and are therefore perceived as the tax cutting party. In politics, before the court of public opinion, perception is reality.
Labour, by contrast is entirely muddled over taxation. Its politicians have no ideological qualms about putting personal rates up, even on the lowest paid (remember the abolition of the 10p rate?) or allowing higher taxation through stealth by failing to match tax thresholds to the rates of inflation or asset growth (such as the hike in property values drawing thousands of people into inheritance tax). Caught by the British publics’ dislike of personal taxation becoming too high, the last Labour government was careful to increase all sorts of duties, thresholds or invent new taxes, raising taxes directly only as a last resort.
More often than not the very wealthy were the prime target, but even the 50p top rate was introduced as an elephant trap for Conservatives, timed as it was to come into effect after the 2010 general election. Had Gordon Brown won that election the top rate increase could have been suspended, for it achieved what even the dog in the street knew it would – it depressed tax revenues. It was purely a gesture, a tax with a political message that failed to go off when the Conservatives decided to accept it.
We now know that it was costly – since its reduction to 45p, tax revenues from that band have increased by some £9bn when simple arithmetic would suggest they should fall – but simple arithmetic takes no account of human behaviour. Knowing it is economically counterproductive, Labour has now retreated from insisting the 50p top rate be reintroduced. We might therefore expect Osborne to cut the top rate back to 40p where the last Conservative government left it, although the law of diminishing returns suggests the revenue increase will be less than £9bn this time.
So what then does Harriet Harman, as acting Labour leader, say in response to Osborne’s Budget – and where does a future Labour leader take his or her party in regard to taxation? This has ramifications for the SNP, for the same laws about the political unpopularity of high taxes have governed its fiscal policy too.
The obvious fiscal approach is one that is conspicuous by its absence from the political debate and needs a champion – the sustained reduction of value added tax (VAT)to a significantly lower level than the current 20 per cent.
Instead of banging on about taxing the rich more and appearing more divisive and anti-aspirational, Labour should instead seek to reduce the tax burden on those with the lowest incomes – and the most obvious way to do this is not be reducing personal taxes but by dropping consumption taxes that affect everyone – including those that pay no personal tax on their earnings or are living on benefits.
It should be remembered that it is only five years ago that VAT was 17.5 per cent and it was taken up to 20 per cent by George Osborne to help deal with the Great Recession. Labour Chancellor Alistair Darling wanted to do the same. If the economic recovery has been as good as the Conservatives says it has then we all have the right to ask the question, when will VAT return to 17.5 per cent? Indeed there is an argument that, now the economy is sustaining consistent growth, with unemployment falling and employment booming – and the public account deficits reducing – a reduction in VAT would help give the economy a further boost that over a full year could be self-funding and ultimately beneficial.
Value added tax has a disproportionately larger impact on those with lower incomes and for that reason is an ideal way of taking more people out of poverty. Making its reduction a central part of its economic offer would show that Labour has grasped how modern capitalist economics works; that it is no longer against the wealth creators but wishes to focus on cutting the poorest paid and permanent or temporarily disadvantaged a break.
One fear in policy making is that an idea might be trumped by a competitor, but, in promising that VAT will become its tax-cut of choice, the Labour Party can always argue it will be bolder then the Conservatives. If the Conservatives say they will take it to 17.5 per cent in the life of the parliament, Labour should welcome the approach but offer to go further – back to the days of it only being 15 per cent.
This does not and should not mean Labour has to find a never-ending supply of public spending cuts. Other taxes can rise marginally, while a cut in VAT will reduce the costs of petrol, which is bound to increase economic growth, helping raise tax revenues, while a similar reduction in the cost of other goods and services should also be beneficial.
There is no difference in the capacity for alcohol consumption by a rich man or poor man but the difference in relative economic impact and personal happiness is, I wager, of far more benefit to the poor man. In these days of politically correct and puritan public health programmes it is these sort of simple rules that Labour has forgotten and needs to relearn.