Stephen Herring: The Conservatives need a bold tax policy that promotes growth and is not hampered by the wrong lessons

Stephen Herring is a member of the TaxPayers’ Alliance research council.

Almost exactly a month ago the bulk of Labour’s recent tax changes came into effect, including the national insurance rise for employers.

They’ve taken a huge amount of pain, but one defence that Starmer loves to reach for when challenged by Kemi Badenoch is that the leader of the opposition doesn’t have an alternative. That’s not a serious point to make for the moment – she’s not in Number 10. But given the likely economic inheritance if Kemi were to take the reins, she would need a credible plan for tax policy, one that is serious about cutting the taxes that hurt incentives, suppress entrepreneurial activity, and block transactions that would otherwise make economic sense.

At the heart of any credible growth plan must be a commitment to reduce the most economically damaging taxes. Alongside this, reforms should aim to simplify the tax system and reduce the distortions that make it harder for workers and businesses to thrive. That’s the real route to sustainable economic expansion.

Of course, any discussion of bold tax cuts brings to mind the Truss-Kwarteng Budget of September 2022, a plan which should have spurred growth but was, in practice, an exercise in how not to implement it.

Without clarity on accompanying spending reductions or an assessment from the Office for Budget Responsibility, markets understandably lost confidence. But the lesson from that episode should not be that tax cuts are unworkable, only that they must be accompanied by clear, credible plans to balance the books.

That has to be part of any plan from the Conservatives as well.

The last time the UK successfully delivered this kind of radical reform was under Margaret Thatcher in 1979 – surely a period in opposition Kemi would want to emulate. Her government enacted a major shift in the tax burden from direct to indirect taxes, cutting income tax rates and raising VAT to fund them. The standard rate of VAT rose from 8 per cent to 17.5 per cent, but the economic benefits were substantial, and the reforms laid the groundwork for a period of sustained growth. Notably, the incoming Labour government in 1997 did not reverse these income tax reductions.

Today, the Conservatives need a similarly bold strategy.

Everyone agrees that economic growth is the only long-term way to meet the mounting financial pressures facing the NHS, social care, and now national defence. To unlock that growth, we must be prepared to temporarily increase indirect taxes like VAT in the short term, in order to enact meaningful cuts to direct taxes. We don’t know the exact situation Kemi could find herself if she was to find herself in Number 10. But these principles will likely remain evergreen.

Here’s how such a plan could work.

A Budget delivering this programme would make several key commitments. First, all direct tax cuts would take effect from April 6th after her chancellor’s first budget, and would remain in place for the duration of the current Parliament. Second, all personal tax allowances and thresholds would be indexed to inflation to ensure people aren’t dragged into higher tax brackets unfairly. Third, the temporary increase in VAT, from 20 per cent to 24 per cent, would be reversed by one percentage point per year, funded by annual savings in government spending. Finally, six-monthly reports on progress would be submitted to Parliament, independently verified by the OBR.

The estimated £38 billion raised by increasing VAT would be fully recycled into tax cuts that encourage work, investment, and growth. Here’s some of the items that package could include:

• A £2,500 increase in the personal allowance, helping low earners and encouraging those out of work to take jobs.
• A £5,000 increase in the higher rate income tax threshold, incentivising people to work more hours or seek promotions.
• Abolition of the child benefit tax clawback from £60,000, which creates an absurd 60 per cent marginal rate for many families.
• Abolition of the personal allowance taper above £100,000, another stealth tax that penalises ambition.
• Raising the stamp duty threshold from £125,000 to £500,000, to revitalise the housing market and make moving easier.
• Cutting the capital gains tax rate from 24 per cent to 15 per cent, freeing up capital for reinvestment.
• Increasing the inheritance tax nil-rate band from £325,000 to £500,000, correcting years of fiscal drag that punish thrift and saving.
• Reversing proposed cuts to agricultural and business property relief, preserving family farms and entrepreneurial business.
• Scrapping Labour’s plan to tax unused pension pots at death, which would otherwise introduce punitive double taxation on retirement savings.

To ensure fairness, £500 million of the VAT revenue would be earmarked for benefit increases to shield the most vulnerable from higher prices.

Taken together, these measures would both streamline the UK’s complex tax code and give the economy a much-needed shot in the arm. We haven’t seen a fiscally ambitious Budget like this since the 1980s. But the challenges we now face of stagnating growth, soaring public spending, and a shrinking tax base demand more than the usual fiddling at the margins.

The country needs a plan that puts growth first. That means restoring incentives, encouraging investment, and backing working families, not through state handouts, but through tax relief that rewards effort and enterprise.

We can’t afford another lost decade of economic underperformance. It’s time to be bold.