The nearest historical equivalent to the 2010 Budget is the sharply contractionary Budget of Sir Geoffrey Howe in 1981. Then, as now, against the advice of influential economists, it focused on reducing the budget deficit and thereby squeezed living standards. But the structure of the measures differs.
The early measures of Margaret Thatcher’s Conservative Government included reductions in marginal income tax rates. In addition, VAT was almost doubled from 8 per cent to 15 per cent.
The income tax increases were not reversed by the 1981 Budget, and VAT was not increased further. But personal allowances were frozen, thereby reducing their real (inflation-adjusted) value. Employee national insurance contributions were increased from 6.75 per cent to 7.75 per cent. There were hefty increases in excise duties, with beer and petrol up 24 per cent and cigarettes up 16 per cent.
George Osborne’s Budget has also been highly restrictive. The fiscal tightening amounts to £40 billion a year to 2014-15, of which 77 per cent will come from spending cuts and the remainder from tax rises. But the Chancellor has ostentatiously stressed the “progressive” element of the increases. He has thus raised personal allowances for basic-rate taxpayers and restored the link – broken by Sir Geoffrey and never restored by Labour – between earnings and the state pension.
But the rise in VAT from 17.5 per cent to 20 per cent is regressive, and it will make a big and unwelcome difference to families on benefits to have those (apart from the state pension and pension credit) indexed to consumer price inflation rather than retail price inflation. Also, capital gains tax rises for higher-rate taxpayers.
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The common theme is the need to reduce debt, and a scepticism of the argument that this will withdraw demand from the economy and risk a further downturn. But the 2010 Budget has been noticeably designed with an appeal to the Tories’ coalition partners. There is, however, another common theme that is highly topical. Both Budgets introduced a bank levy.