The man who lowered taxes and got more revenue as a result points to
the complete fallacy of the Darling tax increase.
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SUNDAY TELEGRAPH 26.4.09
This return to high tax will only deepen our debt
Far from rescuing Britain's disastrous finances, the 50 per cent rate
in the Budget will drive money out of the economy, says Margaret
Thatcher's tax-cutting chancellor.
By Nigel Lawson
The big issue is, of course, the economy, and in particular the
disastrous state of the public finances. By contrast, last week's
Budget, with its myriad pettifogging measures - most of them wrong-
headed, such as the Mandelson bounty of a £300 million subsidy to the
global automotive industry - is eminently forgettable and will be
quickly forgotten.
With one exception; and that is the abandonment of the 40 per cent
higher rate of income tax I introduced 21 years ago, and its
replacement with a rate of 50 per cent on higher incomes.
When, in March 1988, I abolished all the income tax rates, then
ranging up to 60 per cent, above the 40 per cent level (along with
announcing a number of other income tax cuts, all in the context of a
substantial budget surplus: how far-off those days now seem), it was
before New Labour had been invented. So it was perhaps not
surprising, if highly regrettable, that the old Labour benches
opposite me erupted in such loud-mouthed disorder that the sitting of
the House had to be suspended: the only Budget speech by any
Chancellor that has ever been interrupted in this way.
But despite its somewhat controversial launch, it was to prove highly
successful. Far from costing money to the exchequer, it brought in
increased revenue, as many of the ablest came to London from less
benign tax regimes overseas; as many perks were abandoned in favour
of higher pay; and as complex tax avoidance diminished. Indeed, the
tax take from the highest paid (defined as the top 5 per cent of
taxpayers) not only increased substantially in absolute terms, but it
contributed a very much higher proportion of the total income tax
take than ever before. And although it is not possible to measure
this, it undoubtedly gave a fillip to the vigour and success of the
British economy.
It was successful in political terms, too. One sign of this was the
way in which, one after the other, countries with higher tax rates
came to follow the UK example. An even clearer sign was the
determination of Tony Blair, a man of outstanding political nous
(whatever his considerable failings as prime minister), to ensure
that every New Labour manifesto - in 1997, in 2001, and in 2005, on
which the present government was elected - contained a firm pledge
that the 40 per cent higher rate would not be exceeded.
And now it has been raised all the way to 50 per cent. This not only
demonstrates that New Labour manifesto pledges are not worth the
paper they are written on: it will be economically damaging. So far
from contributing to narrowing the yawning deficit in the public
finances, it will increase it as the highest paid move to more benign
tax jurisdictions overseas, or else engage more actively in tax
avoidance, of which the conversion of income into less highly taxed
capital gain is only the most obvious of many examples.
Who would have predicted, incidentally, that Gordon Brown's principal
contribution to restructuring the tax system - apart from making it
horrendously more complex - would be to increase the taxation of
earnings and reduce that on capital gains?
As for the renewed brain drain that the 50 per cent rate will
engender, it is inevitably the highest of the high earners, who
contribute most in tax yield to the exchequer, who will become tax
exiles. Not only do they have the greatest incentive to do so, but it
is far easier for them to move abroad than it is for those only
slightly above the £150,000 threshold at which the new rate bites.
The Tories have nothing to lose in the short run, and much to gain in
the long run, from opposing it.
But as I wrote at the start, the big issue is the overall state of
the economy, and in particular the monstrous public sector deficits
leading to a massive increase in public debt.
The true picture is likely to be even worse than that painted by
Alistair Darling last week. It is hard to escape the suspicion that
the highly implausible trampoline recovery (to quote David Cameron's
apt description) was forecast chiefly because a more likely path
would have generated even greater public borrowing figures - and, in
particular, would not have made it possible to present this year's
deficit, a mind-boggling £175 billion, as the peak. As it was, the
Chancellor was only able to massage next year's forecast figure down
to £173 billion.
But that is not the only reason why the true picture is likely to be
worse. The Treasury's figures assume that the ballooning debt will be
financed at today's low interest rates, which seems highly unlikely.
In other words, the burden of debt interest, already massive and
growing with the amount of public debt, will be considerably higher
than is implicit in the Treasury forecasts.
The Conservative government that is likely to be elected in a little
over a year's time will need to bear down on public spending, in
pretty well all its forms, even more grimly than the Thatcher
government - which also inherited a substantial structural budget
deficit - had to do. In last week's Budget, Mr Darling promised a
further £9 billion of "efficiency savings" on top of the £5 billion
he announced last November. It is an astonishing admission of how
bloated and inefficient the present Government has allowed the public
sector to become on its watch.
The next government will have to force through every penny of these
savings, and a great deal more, by difficult but perfectly realistic
policy changes across the board. In government there are many
problems where it is difficult to see what the right answer is. This
is one where the solution is clear, and well known. The problem is
that what is known to be required is widely considered not to be
politically possible.
The success of the Thatcher government, first elected 30 years ago
next month, was that it extended the bounds of the politically
possible. That is what the next Conservative government will have to
do, starting on day one. The British people were ready for it, even
if many of them did not like it then. They are ready for it now.
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Lord Lawson was chancellor of the exchequer from 1983-89.
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