How much can a government tax? by John Redwood MP

We now know what Labour thought the answer was to this problem. Over the thirteen years of left of centre government the maximum tax take was in 2007-8, when taxes took 36.4% of all our incomes or GDP. This compared with the Conservative high of 38.2% in 1982-3 when the then Conservative government was tackling the large inherited debt from the previous Labour government, and with the 31.8% low the Conservatives got it down to at a later date. Labour inherited 34% and always charged more than that in their thirteen years.

This is why the new government is right to say we have to cut spending. Spending is running near to 50% of GDP. It needs to be realistic in relation to possible tax levels which are more than 10% of GDP lower. Why should we think suddenly the UK economy can sustain taxes of more than 40% of GDP when no previous government in the last 40 years has thought that possible? Who would stay to pay them? Who would carry on working hard and risking and investing more in such a climate? It’s a very competitive world economy, and our main economic competitors already have income taxes and capital taxes well below ours.

The result of Mr Budd’s likely revisions to our forecasts today will be to raise the deficit by lowering the forecasts of future tax revenue from slower growth. If slow growth is our problem – as I believe it is – the correct response is to cut the tax rates on saving, investing, working and creating jobs, not to increase them. Just as the England football team needs strikers to score more goals as well as a goalkeeper to make more saves, so the UK economy needs a bigger tax base as well as less public spending. We need better Treasury control of the spending, and a better private sector performance to bring the money in.

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