George Osborne says 20% VAT is here to stay as he and Janet Daley clash over tax cuts

By Jonathan Isaby

The Spectator's bumper Christmas issue includes an interview with George Osborne, an extended version of which is now available online here.

It is what the Chancellor says about VAT and tax cuts which will be of most interest. 

On the former subject, he makes it clear that he has no intention of reversing the soon-to-be-introduced 20% rate of VAT (it comes into effect on January 1st):

“The VAT rise is not temporary. It can’t be. We are talking about a totally different scale of revenue and the VAT rise is a structural change to the tax system to deal with a structural deficit.”

On the wider issue of tax cuts, he asserts that the 50p income tax rate is a "temporary feature of our tax system" but that he has to make sure "the whole country feels that every part of society is making a contribution to the fiscal consolidation.Trying to keep that sense of fairness.”

More broadly, Mr Osborne does express a desire to reduce taxes, but is critical of the way Reagan did so in the US in the 1980s:

"I would like to reduce taxes - so, in that sense, it would be good if we could bring taxes down. But I’ve always believed the only way to do that is to have sound public finances. I am a fiscal Conservative, I’m not a Reaganite deficit-funded tax cutter. I am actually in that sense more the model that Margaret Thatcher and Nigel Lawson pursued. That means sorting out the public finances - and if there is a surplus, then use that to reduce taxes. That’s what he did in the late 80s.”

"Once we can bring some stability to the public finances, we can look at reducing the tax burden on people. But it is a complete mirage to cut taxes one year, then have to borrow the money and put up the taxes later to have to pay for that borrowing. David Cameron and I for many, many years had this argument with the Conservative party.

“I remember the party conference in 2006 making precisely this point: that sound money was the route to lower taxes and this was before the crash.  I had the argument during the recession when I opposed the VAT reduction because I felt it was being paid for by higher borrowing and the real concern facing the country at the time was ever higher borrowing and deficit levels that were bringing into doubt the credibility of the country’s economic policy. So I am absolutely a proper fiscal Conservative".

This has prompted the following stern response from the Telegraph's Janet Daley:

"Certainly, the Chancellor is in favour (in the abstract) of lower taxation but what he does not support are what he calls “Reaganite” fiscal measures. He will not, he says, bring in “unfunded tax cuts” which would only increase the deficit. Every tax cut, in other words, must be matched by an equivalent spending cut.

"Does Mr Osborne really not accept that lowering taxes actually encourages economic growth thus increasing revenue, and therefore increasing the amount of money which government has to spend – which, in turn, means that each and every tax cut need not be matched by an equivalent reduction in public spending? Does he not appreciate that by cutting payroll taxes (such as National Insurance contributions) you can help to reduce unemployment, thereby increasing the number of people who are paying tax to the Treasury? (He seemed to understand this when he was in Opposition arguing against the Brown government’s proposed increased in National Insurance.)

"Can Mr Osborne really have travelled so far from what used to be his sound understanding of the relationship between lower taxes and economic dynamism?"