POLITICS
When raising taxes is the unkindest cut of all
NOEL MALCOLM
During her emollient interview with Terry. Wogan three weeks ago, Mrs Thatcher made a very unusual remark. Asked about the control of inflation, she said that there were two ways of dealing with it: first, fiscal policy; and secondly, interest rates. This remark went almost unnoticed in the press, but it struck me as memorably odd. Seldom in the past have I heard her even mention fiscal policy when answering this question, and never before have I heard her put it first. As the Budget looms large on the political horizon, can it be that she knows something we don't?
'Fiscal policy' is a vague phrase, of course. All forms of buying, spending and earning are affected, directly or indirectly, by taxes. To put the anti-inflationary emphasis on fiscal policy suggests at the very least a willingness to go beyond a narrowly monetarist explanation of why inflation happens, and make use of some or all of the old, familiar, non-monetarist explanations too: wage inflation, demand- pull, cost-push, that sort of thing. And this is not such a new departure after all. For more than a year the Government has been defending the use of high interest rates more in terms of their effect on spending in the high street than in terms of their effect on credit and the money supply.
If this Government seriously thinks that curbing consumer demand is now the key to controlling inflation, then naturally it will think of using taxation to tug more tightly at the consumer's purse-strings. The trouble with interest rates is that they affect not only consumers, but also indus- try, pushing up its costs of investment and modernisation. If you accept the premises of this argument, then you must agree with Mr Heath that fighting inflation with in- terest rates alone is like playing golf with only one club — and, what's more, hitting several innocent bystanders on the back- swing. A rise in income tax seems to have all the precision of a surgical instrument in comparison.
But does it really? Interest rates can be raised or lowered at a moment's notice: if you are going to fine-tune the economy, here is one of the few dials which offer minute calibrations and fingertip control. The income tax dial locks solid for a whole year at a time. Nor is it certain that a rise in income tax will produce any direct, equiva- lent fall in consumer spending. The savings ratio, already worrying low, might dip a
little lower to compensate; and at a time when the workforce shows great statistical sophistication in its wage claims, people would take it for granted that the next wage round would make up any slippage in net take-home pay.
It is scarcely conceivable that this Gov- ernment would raise the basic rate of income tax, thereby breaking its uninter- rupted record of tax rate reductions. These tax rates have never gone up under Mrs Thatcher, and if you include National Insurance, income taxes have been re- duced in every Budget since 1982. What is conceivable, though, is that the tax allo- wances might be frozen instead of being increased in line with inflation. This is what the Conservatives did last time they wanted to increase income tax, in 1981. It is not without political costs: it hits low earners proportionately more heavily than high ones, and, unlike a straight rise in tax rates, it has to be explicitly approved in the Commons (thanks to the 1981 Finance Act, which took over from the Rooker- Wise amendment — or, as one disting- uished part-time banker likes to call it, the Rooker-Wise-Lawson amendment).
These short-term political costs could no doubt be borne. 'Regressive' is one dirty word which this Government is quite used to hearing by now. But it is the long-term damage that Mrs Thatcher should really be thinking oft the loss of a propaganda war which she has fought long and hard over the last 11 years. To raise income tax now, even in an underhand way, would be to concede the Labour Party's claim that tax cuts have caused inflation. And if that were conceded, some of the most triumphalist parts of the modern Tory creed would lie in ruins. The public may feel guilty, from time to time, at the fact that they are not being taxed more heavily to pay for higher spending on the welfare state; but they can console themselves not only with the money in their pockets, but also with the Thatcherite doctrine which tells them that tax cuts are actually good for the economy. When that doctrine goes up in smoke, they will be left only with their money and their guilt. And if a Thatcher government is going to reduce the money anyway, they might as well vote with their guilt, and vote Labour.
By the time of the next election, the old issue of Tory tax cuts versus Labour spending plans is going to be even more important than it was at the last one. Despite all its own increased spending, the Government will be on the defensive where education, transport, welfare and the National Health Service are concerned, The defence issue will be less clear than it has been at any time since the 1920s. So that leaves the economy and tax cuts. Researchers at Conservative Central Office are already accumulating an im- pressive dossier of Labour spending pledges, amounting to at least £8 billion so far. It will be an irony indeed if all their diligence is undermined by a new govern- ment line which says that tax increases are good for you.
Some general rhetoric about belt- tightening and harsh measures is to be expected, of course. Mr Major will want to earn headlines with words such as 'tight' and 'firm' in them (and no, I don't mean headlines about Sock Shop). He has some catching up to do in the machismo stakes, and in domestic political terms he will need to show that he can at least stand up to Mrs Thatcher (rejecting, for example, her ge- nuinely inflationary desire for a rise in mortgage interest relief). The Bank of England has already urged him to adopt a tight policy, both fiscal and monetary; and the foreign exchange dealers will also be looking for a general air of toughness in his Budget.
But the unfortunate truth is that no one can really judge what would count as a 'tough' policy, because no one knows in sufficient detail what is happening in the economy at the moment. The figures for such vital things as stock levels do not exist. And even if the economists had the details they lack, they would still be using wildly uncertain theories about the inter- relations of interest rates, the budget sur- plus, the trade deficit and the exchange rate. How can you assess what fiscal toughness is necessary, when you don't even know what revenues the Government is going to get anyway? During the Lawson boom, the gross inadequacy of the Govern- ment's estimates on this point was just a source of pleasant surprises. Now we don't know which way the surprises will go, and all clever calculations are dwarfed by this margin of error. In the circumstances, the Government should stop trying to twiddle the dials on a black hole, and stick to the one thing it knows reasonably accurately: its political principles.
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