The possible flaw in their argument is taking the tax rise in isolation. They’re assuming every option for spending restraint is an alternative. The brutal fact is we’re probably going to implement all the cuts they can think of, dream up a few more, and raise taxes. That’s how big the hole is.
The other point to bear in mind is that not all the extra VAT revenue needs to be used to pay down the deficit. At least some of the £13bn from a 2.5 point rise could be used for other tax breaks. VAT is a regressive tax that may be used for a progressive give away — such as raising the income tax allowance.
Just look at the maths.
After the £6bn National Insurance cut, George Osborne is left with a £51bn deficit reduction plan of £12bn tax rises and £39bn spending cuts.
If he seeks to eliminate the deficit by 2014/15, he’ll need a total package of £85bn.
Assuming the extra £34bn is met through spending restraint, then Osborne is left with a £12bn/£73bn consolidation mix is close to his ideal 1:4 ratio.
Now plug in a 2.5 point hike in VAT, the bank levy and CGT changes. Say in total it raises £18bn. Osborne could set aside £8bn to pay down the deficit, leaving a £20bn/£65bn deficit reduction plan, which is close enough to his 1:4 “rule of thumb”.
The remaining £10bn would then be his to play with. The obvious move would be to raise income tax allowances by £1000, which will cost about £6.5bn. Ian Mulheirn at the Social Market Foundation has sent me this handy chart to see the distributional effects.
Basically the move would be progressive, in terms of proportion of income, for anyone earning less than £24,000. It would mean £200 in the pocket of most working families.
That takes the bite off the VAT rise. And it gives Osborne the room to make the case for indirect taxes giving people more choice on whether to spend or save. You could even imagine his five year Budget using VAT to pay for staggered increases in the allowance all the way up to £10,000.
Wouldn’t this sweetner be enough to ease the concerns of the Thatcherites railing against VAT?