Higher taxes and curbing the budget deficit

Today’s Telegraph story places a strange headline and spin on Tory plans for curbing the budget deficit.

We are told that Tories are considering a VAT hike to 20%, after this government’s hike back to 17.5% at the end of this year.The source is said to be Shadow Cabinet, probably meaning it is not the Leader or the Shadow Chancellor.

The story does correctly report that the leadership understands that we have a spending problem. The UK is not under taxed – it is overspending at its current level of income and wealth. Paradoxically, if you raised tax rates on income and wealth from here you could end up with a worse deficit problem, as you could damage the recovery and encourage more businesses and entrepreneurs to go abroad or stay abroad.

Whoever briefed the story did not seem to grasp the scale of the problem. The deficit and borrowing levels are running at around £200 billion a year. A £10 billion spending tax increase would only deal with 5% of it. We need a five year programme of reducing spending, by cutting out waste, inefficiency, high cost and less desirable programmes and areas of government. We also need a five year programme designed to encourage a faster growth rate, which means low taxes on enterprise and wealth, not higher. The faster we grow, the quicker the deficit will come down given sensible spending disciplines.The good news is the waste, inefficiency and needless expenditure is now so huge that the cuts can come, they need not damage valued public services like schools and hospitals, and they in many cases will be popular. This website has been idientifying some of them, with more to come. For all those who do not regularly read this and want to ask what should we cut, please read the series from two weeks ago and you will see some of the answers.

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9 Comments

  1. Neil Craig
    Posted August 9, 2009 at 12:14 pm | Permalink

    “UK is not under taxed – it is overspending” – a very good line which explains exactly where the fault lies. I consider growth to be far more important than the deficit. If we got Ireland’s 7% growth, let alone China/India’s 10% thjen even a much higher deficit would be payable, while paying off the deficit, at the cost of continuing recession would permanently impoverish us. This sounds a bit like what brown has been saying the difference being that when he borrows he uses it just to increase parasitic state spending rather than the productive stuff. I would be happy to see government cutting corporation tax immediately (so long as it was also cutting government) even if it meant a net increase in spending.

    I would be even happier to see the abolition of much of the most economically destructive government spending (Safety Exec, planning restrictions, more reviews of nuclear).

  2. Jon
    Posted August 9, 2009 at 1:00 pm | Permalink

    Yes odd as I thought also that Labour had indicated it would go up back to 20%, silly story.

    Nonetheless, 6 million civil servants, largest per head in the world. That can’t be cut at a stroke. Identifying 20% cuts is still a huge task that will take time. I would imagine to ease the burden there maybe some privatisations to take on some of that task. I would imagine it would take a few years to do and with a rise in staff costs from redundancies. Can that interim period be managed without tax rises. It would be nice if it could but can it.

  3. ScotsToryB
    Posted August 9, 2009 at 2:13 pm | Permalink

    John,

    Sorry, we do not need five year plans.

    Full stop.

    If ever there was a Fabian/Communist/Communitarian way to solve a problem it was to propose a ‘five year plan’.

    Why not instead of:

    ‘We need a five year programme of reducing spending, by cutting out waste, inefficiency, high cost and less desirable programmes and areas of government.’.

    ‘We have a plan to continually reduce spending, by cutting out waste, inefficiency, high cost and less desirable programmes and areas of government?’.

    Simples.

    To use the current terminology.

    STB.

  4. Mike Stallard
    Posted August 9, 2009 at 4:38 pm | Permalink

    The Telegraph may have been misleading in its banner headline.
    But it was certainly spot on in the Leader.
    It noticed the government profligacy in the public sector. It noticed the stranglehold that bureaucracy imposes on creativity. It mentioned that tax was not necessarily the answer. It pointed out that even Mrs Thatcher failed to reduce public spending.
    If any government simply comes in and sacks all the useless mouths, then we are going to be back to Sunny Jim and Crisis, what Crisis. Already there are strikes appearing in all the usual places.
    It really will take at least 5 years to allow the bloated public sector to retire, move on and die off naturally, even if the Guardian Jobcentreplus is muzzled.

  5. Brian Tomkinson
    Posted August 9, 2009 at 6:05 pm | Permalink

    There are far too many of these tax increase stories flying around. As you know and write frequently, major reductions in spending are the first requirement and in fact the only way to resolve the deficit problem. The Conservative shadow cabinet members, when they can gird their loins to say anything, are worryingly and regrettably far less forthright.

  6. Brian E.
    Posted August 9, 2009 at 10:22 pm | Permalink

    We’ve had plans galore from the Labour governments; none seem to have achieved anything. Plans to improve schools, plans to cut waiting times in A&E, plans to cut crime, the list is endless. All we have got from these plans are more bureaucrats fiddling statistics to make sure targets are being met.
    What we need is action and the immediate reduction of the size of the Civil Service and Quangos to the size they were when Labour took power, and then and only then, a plan to reduce them still further.
    I remain convinced that we will see no significant reduction in state employees under the Tories and I believe that the numbers will continue to rise; after all on past form, we will need a commission or some other body to oversee the staff reductions.
    I’m still waiting for a senior member of the shadow cabinet to even suggest that there might have to be staff reductions; regrettably I think the wait will be in vain.

  7. Dr. Christopher Wood
    Posted August 10, 2009 at 9:25 pm | Permalink

    President Obama should listen to you Mr. Redwood. The degree of overspending on the US side of the ‘wee pond’ is so off the chart that people can’t grasp how much money is being spent. Obama has trippled the budget deficit and wants to soak, inter alia, small businesses with new taxes including a punitive 2.5% tax on turnover if the small business does not provide a government approved health care plan for its workers. I can think of nothing more damaging than increasing taxes and costs of small businesses in the middle of a nasty downturn. Small American businesses are going to take longer to re-hire people, will cut worker’s hours or let workers go, or outsource work to contractors to reduce head count.

    Expect Americans to buy less imported goods – Mexico is already being hit hard because its main customer (the USA) is importing less manufactured goods from Mexico – expect this trend to spread to Europe/UK – in fact it already has, but it’s going to get a LOT worse as Obama hits hardworking American business owners with more taxes right in the middle of the worst recession in living memory.

  8. Alister
    Posted August 11, 2009 at 8:52 pm | Permalink

    Personally I favour easy fraction taxes (10% = 1/10, 20% =1/5, 12.5% = 1/8 etc) as they are easy to do. True most things are done by computer today, but it means that we can simply the tax system.

    Also moving taxes onto what is spent rather than earned will help the poor as the rich tend to buy more VAT able items.

    On road tax this for cars should be related to the number of seats? If it was say (factor x CO2) /(seats x seats x seats) then a 2 seat ferrari would have divisor of 8 and a 7 seat family car 343 (family car pays 40x less road tax).

  9. Guy Herbert
    Posted August 12, 2009 at 7:24 am | Permalink

    Might it not be a good idea to increase VAT in order to scrap and simplify, and reduce other taxes and the compliance burdens that go with them? VAT is by no means as simple as it could be, but it is a darn sight simpler and in practice less bullying than income taxes, aggregates levy, the newly more complicated VED, the newly more complicated stamp duties, etc etc etc

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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