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Wrong, Mr Osborne, the VAT rise was completely avoidable

Yesterday I argued that a VAT rise was "unacceptable". Today George Osborne said it was "unavoidable". Over at Comment Central Danny Finkelstein argues that the Chancellor is right. I paste Danny's four key arguments below - and my responses.

DF: "Even using the 80:20 ratio (raising 80% from cuts in spending) - a very robust thing to do - more tax revenue is required. VAT is probably the most politically palatable way to raise the money."

No tax rises are politically palatable but VAT is one of the least palatable according to Angus Reid polling, published just yesterday. 20% of Britons had a preference for higher VAT. 52% suggested 'sin taxes'. Sin taxes could not raise as much as an extra 2.5% on VAT but £2bn or £3bn extra in such taxes (which Mr Osborne did not increase) plus my main recommendation - across-the-board spending restraint - would have meant VAT could have stayed at 17.5%.

DF: "Even with 80:20, the cuts in public spending are vast - unprecedented, incredibly difficult to absorb. The Chancellor cannot be accused of going easy on the public sector as he raises taxes."

Wrong. The Chancellor can be accused of going easy on large parts of the public sector... and being far too harsh on other parts. Why has the NHS budget - which has grown fastest - not part of the restraint? Why are English taxpayers continuing to subsidise Scotland and Wales because of a thirty year-old, outdated formula for distributing money across the UK? Isn't it time Scottish students pay tuition fees like the English and the Welsh pay for prescription charges? Why are we paying rich pensioners the Winter Fuel Payment when more than 80% are not in fuel poverty? Why do we send £20m (net) to the EU each and every day when the Commission can't even audit its own accounts? The fact is the Chancellor has gone easy on large parts of the public sector.

DF: "Because of the demographics and rises in options for treatment, this will prove a very difficult period for the NHS even without cuts. In order to maintain frontline services, the NHS will be forced to reform the way it works, to release funds. And this will be controversial enough. But if the billions of pounds of cuts Tim contemplates were added in, the political situation in the NHS would become very difficult, very quickly and the Conservatives, already fighting fires elsewhere, would struggle to cope. The electoral price of being seen to let the NHS down - one of the things voters worried about most - would be very great."

I agree that the NHS faces particularly difficult cost pressures and it's probably right that its share of the cuts should be smaller as a result but I don't for a moment believe that the money poured into the NHS over recent years has been well used. Just look at NHS productivity rates and the massive disparity in performance levels between hospitals.

DF: "That is the reason why the party promised to ring fence the service. But the promise adds another dimension. Having promised to protect the NHS budget as a central feature of the campaign, this item is simply off the table. I would urge Tim to reflect on the damage that would be done to the reputation of the Conservative Party, if it simply dropped a pledge of that size, perhaps its biggest pledge of all. That was not an option. So, I think, regrettable though it is, VAT had to go up."

I agree that there are dangers here but I think voters would have accepted cuts in the NHS budget if we said frontline services would not suffer. This could and should have been part of the Coalition deal. The Liberals sensibly refused to ringfence the NHS in their manifesto. It's an adjustment of the pledge rather than an abandonment. As research by 2020Health shows, £12bn can be saved (£1bn more than the proceeds of the 2.5% VAT increase) without cancelling one operation.

Also, Danny, I think the trust issue may hurt on VAT, too. Watch this video from 1st April (no joke) from 2 minutes 4 seconds in:

Increasing VAT, as done today, rather than narrowing the NHS pledge, will do nothing to restore trust in politics.

I think the ambition in today's budget - to repay nearly all of Labour's dangerous borrowings - by 2014/15 is to be welcomed. I welcome George Osborne's corporation tax agenda, in particular. But VAT at 20% is an unnecessary and regressive way of getting back towards balance. I would have been much happier if it had been announced as a temporary two or three year measure to get us out of Brown's mess. I fear, however, it is another ratchet upwards in the tax burden and a payment towards an insufficiently reformed public sector.

Tim Montgomerie


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