Will taxes be cut when the budget is balanced?
We were told George Osborne’s first budget would be one of the most radical in recent history, but it was not. If it warrants a footnote to history it will be for the size of the numbers, not any change of direction.
The introduction of VAT – announced by Anthony Barber in 1971, two years before starting at 10 per cent - might be seen as a radical shift in public financing. And another Tory chancellor, Nigel Lawson, gave a radical 1988 budget when he reduced the basic rate of income tax and abolished the 45 per cent, 50 per cent, 55 and 60 per cent rates leaving just two rates – 25 and 40 per cent. Lawson’s budget also first taxed capital gains at income tax rates. The 1990s short-lived poll tax might even be considered radical.
But Osborne’s first chance to change the nation’s finances contains nothing to warrant the word. He has raised the rate of VAT but not changed its scope, retained Labour’s 50 per cent top income tax rate and raised the capital gains Tax rate without allowing indexation, tapering or any other mitigation. It takes CGT back towards income levels – indeed, it is higher than the income tax rate for basic rate payers. There is nothing new about wage freezes and his tax on bank deposits revives the levy imposed in 1981 by Sir Geoffrey Howe.
The new Tory chancellor may not have had scope for tax giveaways but high rates and new taxes can be radical. His claim to fame, if he pulls it off, will be to cut government spending – but not to new lows, merely to undo part of the increase of the past decade. Slashing departmental expenditure by 25 per cent or more is a tough target to achieve, nevermind tough on the beneficiaries, but public spending is still forecast to be almost 40 per cent of GDP in 2015 – below the current 47.5 per cent but higher than historic levels. And even then, government receipts will still not cover that reduced spending.
So Osborne’s place in budget lore will not be for its radical direction but for the scale of his task. And having broadly balanced the budget by the next general election, what will he do then? He will still have billions pouring in from raised National Insurance, VAT, bank taxes, insurance taxes and the 50p income tax. One word missing from his first budget speech was “temporary” – there was no indication that once the nation’s finances are stable again he will ease these taxes or even start spending again.
Maybe that is his surprise for a future budget, but an indication that the austerity may one day end would have made the changes more palatable. The suspicion is that these temporary measures will become permanent – just like William Pitt’s radical introduction of income tax in 1799 as a “temporary” way to finance the Napoleonic wars.
