Daily Archives: June 22, 2010


Liberals and the VAT Question

I remember having a passionate argument with John Pardoe about VAT in a pub during the Cambridge City by-election. Pardoe enjoyed Vince Cable levels of popularity as a liberal economic spokesman in those days – his flagship policy proposal was reducing income tax and increasing sales tax (sorry, too lazy to check if it was already called VAT then). He characterised it as switching from tax on income to tax on consumption. I was 17. I took myself very seriously in those days; it was with retrospect kind of him to do so.

I argued VAT was regressive – the rich and the poor pay at the same rate. As the poor save less, it means a higher proportion of their income will go on tax. Pardoe said the rich buy more expensive luxury goods, so will pay more tax.

I haven’t changed my mind in the intervening 35 years. I would much rather the extra 13 billion pounds had been raised by increasing income tax on incomes over the higher rate threshold.

I very much welcome the curtailment of housing allowances, which have boosted both private sector rents and property prices and contributed to Britain’s still overheated housing market.

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Budget Day

We all wait to see what the budget has in store. This is less fun than it used to be, as it has been heavily trailed that the personal tax allowance will be raised by £1,000 as a first stage towards lifting a very significant number of people out of tax altogether, and improving the work/benefit incentive. That is a good thing.

The banking levy will be another good thing, but far better would be a transaction tax that penalises continual speculative trades. Capital Gains Tax increases are likely to be watered down to protect wealthy tories with second homes. I fear we will see punitive duty increases on alcohol; only the wealthy are to be allowed to get drunk. But I am uncertain where the tax rise required is going to come from, if neither the basic rate of income tax nor the rate of VAT is to be increased.

I fear we may not get a great deal of detail on the cuts until the public spending round in the autumn, though we should get headline figures today, which will be helpful.

I very much favour public spending cuts. I am unabashedly ideologically committed to a major reduction in a role of the state. So I am more than happy to see an early hack at it. Of course the things I would immediately cut are not going to be cut. My main concern is that the legitimate redistributive role of the state is not weakened.

Some ideas of what I would do:

Cut Trident, aricraft carriers, nuclear submarines, end the Afghan War immediately.

Cut all local government salaries over £28,000 by 15%, with a phase in mechanism at the margin.

Make everybody in local government earning over £50,000 immediately redundant.

Freeze all civil service incremental pay scales.

Set an automatic civil service pay mechanism: annual salary increase = rate of economic growth plus inflation minus 0.25%. Backdate the formula to January 2007 and adjust salaries accordingly.

Cancel all PFI projects immediately without compensation. Pay only assessed construction cost to date.

Cancel all operating PFI schemes without compensation. Pay assessed construction costs plus interest minus PFI payments made.

End all government arts spending and close the British Council.

Replace incapacity benefit with a single needs assessed welfare payment to all unemployed people, regardless of why they are unemployed.

End all internal market procedures within the NHS and the rest of the public sector.

Institute a civil service and local authority recruitment freeze for three years.

Means test all state payments including basic old age pensions and child benefit.

Sadly the budget won’t be nearly this exciting. What would you like to see?

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