For the Record

by David Cameron

  The conversations about the actual content of the Budget in 2012 were initially kept strictly between the Quad, plus James Bowler, who was now the Treasury’s Budget director.

  Nick Clegg and Danny Alexander had been living their own Shakespearean tragedy – hammered over tuition fees and their failure to stop the European veto. They wanted a significant increase in the personal tax-free allowance, their flagship policy, to win back support and fulfil their manifesto.

  We couldn’t believe our luck – after all the years listening to Lib Dems wanting spending increases, they were now actually asking for a tax cut. It was a hugely necessary one. While employment was beginning to grow – we had created more private-sector jobs in two years than Labour did in ten – wages weren’t keeping up with inflation, and people were feeling the pinch.

  But such tax cuts would have to be accompanied by spending reductions or other tax increases. The Eurozone crisis, coupled with the rise in oil prices, had stifled growth forecasts, and this in turn meant the deficit wasn’t falling as fast as the Office of Budget Responsibility originally forecast. We had always defined ‘Plan A’ as the spending plans we had set out rather than the deficit target. However, it would be wrong for us to add to the deficit through our own discretionary measures.

  Meanwhile, our appeal to the world as a great, global trading nation was being undermined by the fact that we had higher corporate taxes than Germany, and higher top-rate income taxes than France. One idea was to cut the top rate of income tax, currently 50 per cent for earnings over £150,000.

  I had always thought that the increase from 40 per cent to 50 per cent that Gordon Brown introduced in the dying days of his government was a mistake. But in the age of so-called ‘motivation politics’, where you are judged as much on what people believe to be your motives as on what you actually achieve, cutting it now could be deeply harmful for the government. Whatever the economic case, we would be seen as the party of the rich, cutting taxes for the well-off at a time of austerity.

  Yet George was persuasive. He described the increase in the top rate from 40p to 50p in April 2009 as a classic Gordon Brown bomb. Brown knew that it wouldn’t raise extra revenue. He knew that it could deter people from investing in Britain, or push them to find tax loopholes. But he also knew it made him look good because it was a tax on the rich. And he knew that whoever opposed it or felt it right to reduce it to encourage investment – us – would pay for it politically.

  George accepted all of that, but he knew we couldn’t win the argument that Britain was the home of enterprise if we kept this tokenistic and damaging tax rate.

  I came around to his thinking. In politics you often come across what I call ‘the last piece of the jigsaw’ problems. You identify an issue. You marshal the arguments about the need to tackle it. You introduce a series of measures to do so. But no one takes you seriously because there is something – usually something controversial or unpopular – that you are holding back. You often get nowhere with either the experts or the press or the public unless you are prepared to put in place the most difficult piece of the jigsaw.

  A good example would be early efforts to try to solve the housing crisis without radically reforming planning. Another would be initial attempts to tackle obesity without taxing sugar or fizzy drinks. In both cases I started cautiously, and then persuaded myself to get on and complete the picture.

  We could have all the pro-business schemes you wanted – from visas for foreign entrepreneurs to interest-free start-up loans for domestic ones (both of which we did) – but they would never complete the friend-of-enterprise picture without the most vital piece in the jigsaw. We needed a top rate of tax that said ‘Go for it.’

  For the moment, George and I didn’t debate how much the cut should be, because there was another question to be settled first: how to get this through the coalition.

  Here, George pulled off something extraordinary. In a succession of Quad meetings, the arguments had flowed to and fro. The Lib Dems wanted their increase in the personal allowance, we wanted to go ahead with a cut in the top rate of tax. They wouldn’t agree our policy, and so (even though we supported it) we told them that while they held us back, we wouldn’t find the revenue for theirs. We didn’t see these as policy alternatives – they fitted together – but at the same time we had to get the Lib Dems to shift.

  We had a plan for wearing them down. We produced idea after idea about how we could pay for the cut in the top rate by taxing the richest in other ways, through targeting aggressive tax avoidance, closing down loopholes and looking at how we taxed the most expensive properties in the country. These made political and policy sense anyway.

  George would then dangle in front of them just what a boost to incomes a big increase to the personal allowance could provide. And they could also see that our motivations for cutting the top rate were sincere. We really believed that the current rate was holding back our economy – the issue on which we would all ultimately be judged.

  And so, on the evening of Sunday, 4 March, the four of us sat on the two yellow sofas in the kitchen of the No. 10 flat, discussing the issue once again. And on this occasion George not only persuaded Nick and Danny of the need to cut the top rate; he convinced them – a left-leaning, not particularly business-loving party – that we should cut the top rate not to 45 per cent, which was one of the options, but all the way back to 40 per cent.

  Contrary to some reports, it wasn’t the cautious Lib Dems who reined in a gung-ho chancellor. It was me. To cut the top rate to 45 per cent was reasonable. It would still send out that important pro-investment message. It would cost much less than a 40 per cent rate in terms of lost revenue in the short term. Most authorities, including HMRC, agreed that 45p was the revenue-maximising rate. And crucially, the new rate was higher than the 40 per cent Labour had stuck with throughout all but one month of their thirteen years in power.

  All this, however controversial, was the easy bit. We were reducing revenue by raising the personal allowance and cutting the top rate of income tax, which though eventually neutral would cost us in the beginning. Yet we were determined not to add to the already deteriorating deficit figures. So we needed to raise revenue. And this, ultimately, is what brought the Budget down.

  It was essential that a good portion of the revenue raised came from the richest in society. Which is where the vexed issue of a ‘mansion tax’ came in. The idea had been circulating in British politics for some time.

  The Lib Dems wanted a mansion tax – it was in their manifesto. The chancellor wanted a version of one, having become convinced by the Treasury that we taxed income too much and property too little. After many lengthy discussions, the leading option became having two additional council tax bands with a percentage rate of the value of the house: one for homes over £2.5 million and one for homes over £5 million.

  The idea has merit. Excessive taxes on income create disincentives and can have a bad economic impact, as people can change their behaviour or even move abroad to avoid them. Unlike people, properties can’t move – and there is a strong argument that in the UK they are under-taxed. Council tax bands treat houses worth £500,000 and £5 million the same – and they hadn’t been reviewed for years.

  But the original mansion-tax idea – a blanket annual percentage levy on the most expensive homes – was effectively a wealth tax. Someone with a £2 million house would pay £20,000 every year. This was something I found unpalatable. Taxing people as they accumulate wealth, or when they sell their home or pass it on, is one thing. If you tax a property at the time people buy it, then it’s clear they can afford it. Taxing someone’s home year in, year out on a percentage basis seemed to me to be quite another.

  I was also thinking of the forthcoming London mayoral election. The overwhelming majority of houses over £2 million were in the capital. Yes, many of them were mansions whose owners could afford to pay more tax. But a g
ood number belonged to people who couldn’t afford a £20,000 or more annual bill, paid out of their hard-earned income or pension. Frankly, I didn’t think we could win the city if we pursued it.

  So I’m glad we avoided a wealth tax. Sweden has recently got rid of theirs; France did the same in 2017. We will need to return to the idea of higher council tax bands at some stage in the near future, but disconnected entirely from the idea of a mansion tax.

  Instead, we chose to hike stamp duty on the most expensive homes – from 5 per cent to 7 per cent on those worth more than £2 million – a far better measure, since it taxes people at the time of purchase.

  My mistake was that I should have simply said ‘No’ to a mansion tax at the start. It meant we spent too much time killing the idea rather than looking more carefully at the other revenue-raisers. Because if the money wasn’t going to come from ‘mansions’, it would have to come from somewhere else.

  The Treasury produced a series of anomalies in the tax system that needed sorting out and would raise revenue at the same time.

  First was the so-called ‘age-related allowance’. Pensioners had an extra tax allowance, over and above the personal allowance, for money they could earn before having to pay income tax. As raising the personal allowance was the centrepiece of the Budget – and would eventually overtake the old personal allowance and the age-related allowance combined – it made sense to freeze the latter. The basic state pension was soon to rise by over £5 a week, all the pensioners’ benefits had been protected, and there would be no cash losers as it was a freeze, not a cut. What could possibly go wrong?

  Next were anomalies in the VAT system. Some of them are hard to explain, and even verge on the comic. We charge VAT on moving caravans, but not static ones. We charge VAT on chocolate-covered biscuits, but not cakes. (Jaffa Cakes, which I am sure fans like me would count as a biscuit, once baked a giant version to prove it was really a cake, and thus exempt from VAT. They won.)

  I vetoed the cakes, but agreed to what seemed a sensible change on caravans.

  We also tried to correct the anomaly that VAT is charged on building repairs, but not when the building is listed. Most listed buildings are houses owned by rich people, so this seemed another anomaly that would both raise money and ensure that the wealthiest paid their share. It was ridiculous that ordinary families should pay VAT when they have a kitchen extension, but a duke pays no VAT on building a ballroom. Again, another disaster – this time involving churches – lurked in the fine print.

  Then came food. Nigel Lawson had extended VAT to hot takeaway food in the 1980s. It was unpopular, but there was a logic to his change. He was trying to support restaurants and pubs, which already paid VAT, in the face of competition from takeaways. And he was raising money at the same time.

  But it had created a new anomaly. If you bought hot food from a takeaway you paid VAT on it; if you bought it from a supermarket you didn’t. Our plan was, quite simply, to put VAT on it all. This to me seemed sensible and fair. More to the point, it seemed unambiguously in favour of the little guy. The chip shop or kebab shop owner, who had to charge VAT, was being undercut by supermarkets, which didn’t.

  We thought we had already averted disaster when the Lib Dems proposed levelling the playing field between eat-in and takeaway food – which would have meant taxing all sandwiches. The political pitfall of targeting people’s lunch screamed out at George and me. Of course it would have been a big revenue raiser, but we’d be the modern-day ‘milk snatchers’ – the sandwich taxers.

  So far from thinking we were running into a hail of bullets, we believed we had dodged the worst of them. A big mistake.

  The only easy part of the Budget was the fact that because of the faster than expected drawdown from Afghanistan, we had a £2 billion windfall that would help the numbers to add up.

  So this Budget seemed to stand firm. Its contents were known only to the Quad. It added up financially. It was fair – stamp duty more than paid for the cut in the top rate. In fact, the rich were already paying more income tax than ever before: 1 per cent of people paid 27 per cent of income tax. It could be the masterstroke that eased the cost of living and lifted our economy out of permanent stagnation.

  But then, the weekend before Budget day, details started appearing in newspapers and on television. Most damaging of all, the Guardian revealed the reduction in the 50p rate, and ITV and BBC News reported the rise in the personal allowance.

  On Budget Day itself, 21 March, the advance headlines confirmed the leak. ‘Tax Bills to Fall for 20 Million’ trumpeted the Telegraph. George was furious. With the good news out there, Budget day and the following day’s coverage would be dominated by the revenue-raising decisions.

  The following day the whole thing started to come apart. The top story was the phasing out of the age-related allowance: ‘Five Million Pensioners Robbed in the Budget.’ No one was interested in the fact that millions of low-paid people would be paying less in tax – that was yesterday’s news. No one cared that the age-related allowance freeze would soon be offset by the personal allowance increase – that would get in the way of a good narrative, which was the Tories hammering the elderly with the ‘Granny Tax’.

  What made it all worse was that it was juxtaposed with the cut in the top rate of tax – ‘Rich Win, OAPs Lose’ said another splash. Again, no one was interested in the fact that it was higher than Labour’s top rate, or that the rich would be paying more through stamp duty.

  It wasn’t just that the leaks destroyed the vital news balance between tax cuts and tax increases. It was that with the lost revenue from the personal allowance we had set ourselves too high a hurdle to jump in terms of raising fresh cash. And we had done this in a difficult environment economically and thus politically, and at a fraught moment in our relationship with the media.

  It was clear there was to be no respite at the weekend when Craig Oliver rang me to say that the Sunday Times had a big story about our new party treasurer, the businessman Peter Cruddas.

  I always erred towards the benefit of the doubt, but when I heard what Peter had said, I knew that this wasn’t survivable. He had been recorded telling undercover reporters that a donation of £250,000 would give them ‘premier league’ levels of access to me and other senior Conservatives.

  Peter is a self-made man. He had helped out over the AV referendum and done great charitable work. I was sure he hadn’t meant to overstep the mark. But although he urged us all to wait for the full transcript of his conversation with the undercover journalists, my mind was made up. There was no context that could mitigate his comments. We didn’t sell access or honours or policies or anything else, and to fall into a trap that made it look as if we did was deeply damaging. He had to go.

  But there was no time to dwell on this. I had signed up, together with Samantha, Nancy and Elwen, for a charity fun run – the Sport Relief Mile – on the Sunday. I ended up giving my response to the scandal standing in a field in Oxfordshire wearing a Sport Relief sweatshirt. It was the same day that the first post-Budget polls were published: they showed that, having been neck and neck with Labour, we were now seven points behind.

  On the Monday I thought, ‘New week, new start.’ It was a big day for me, as I was visiting the National Neurology Hospital and the Dementia Research Centre to launch something incredibly close to my heart.

  But during this month – this mad March – any attempt to seize the agenda was futile. Within hours the agenda once again seized us, as fuel-tanker drivers from the Unite union held a ballot on a walkout scheduled for a week’s time.

  Fuel strikes have the power to bring an entire country to a halt. They can also be disastrous for governments and their reputation for competence. The crisis of 2000 was the one moment in his first administration that Tony Blair’s grip on power looked in danger and his poll ratings fell below the Conservatives’.

  Mindful of this,
we tried to get ahead of the game in our early years in government. Oliver Letwin was meticulous in finding out how many fuel-tanker drivers the army had, how long it would take to train more, how much fuel could be stored on our military bases and elsewhere.

  I knew that what we communicated was almost as important as what we were doing behind the scenes. If there are rumours of a fuel strike, the sensible thing to do is to advise drivers to keep their tanks topped up, because there is more space in the fuel tanks of thirty million cars than in all the country’s petrol stations. But on the other hand, if at any time this tips into panic buying, the petrol stations’ supplies rapidly empty and you help to cause the crisis you are trying to avert.

  By Wednesday I was trying once again to shift to a more positive, proactive agenda, as the International Olympic Committee were visiting London to prepare for that year’s Games. But as I scanned the news­papers it was clear the shaky Budget was about to collapse further. ‘Let Them Eat Cold Pasty’ blared the front page of the Sun, a reference to the new VAT rates on hot takeaway food.

  Pasties. I hadn’t even thought about pasties. Spring rolls, saveloys, chips and chicken wings – we’d discussed the lot as we stress-tested the VAT rise. But no one had mentioned pasties – and, importantly, no one in the Treasury had raised the problem with the Quad.

  They should have done. Pasties were in a sort of VAT no-man’s-land before the Budget. They were hot food – heated up, not cooked – and not necessarily sold for instant consumption. So in the past they hadn’t always been subject to VAT, but now they would be.

  Just like ‘Grannies versus top-rate taxpayers’, the significance was the symbolism. We were targeting a snack so ubiquitous at motorway services, in food vans and supermarkets that it was associated with ordinary working people. I knew it was bad when George came into my morning meeting and said he had just been followed around Whitehall by someone from the Sun dressed as Marie Antoinette holding a tray full of pasties.