Here’s some interesting archival material relating to a politician coming into office determined both to restore the public finances and do something about oppressive levels of taxation, particularly direct taxation:
Treasury ministers planned the budget around the need to make a substantial reduction in income tax, to improve incentives and hence economic performance. Although significant reductions in planned spending totals were being sought, these seemed likely to do little more than hold the public sector borrowing requirement to £8b (and in the event the outturn was much worse, closer to £10b). Consequently the only way to fund the income tax cuts was to make a large increase in indirect taxation, principally by increasing the rate of VAT.
The papers show that while generally MT accepted the logic of the direct/indirect tax switch, which indeed she had publicly endorsed, she worried mightily about the political and economic effects on the retail price index (RPI) which would show an increase of more than 3 per cent if VAT was put up to 15 per cent, as Howe urged. Instead she argued passionately for further spending cuts, notably in a meeting with all the top Treasury ministers and officials on 16 May when they were told they were being “not nearly tough enough”. She urged that the VAT increase should be limited to 12.5 per cent, sought ways not to backdate income tax cuts and even suggested deferring them altogether to the following year. But Howe did not yield and in the end the Treasury got the budget they wanted, predictably enough perhaps.
And who was the big-government enthusiast who did this? Well, the initials “MT” might be one clue. The fact that the source of this extract is the Thatcher Foundation is another. It’s worth noting that when MT took office and hiked VAT, public spending as a percentage of the UK’s GDP was around 43 percent. By the time MT left 10 Downing Street, it stood at around 35 percent.
In the right hands, VAT is part of the solution, not part of the problem.