Power Trip

by McBride, Damian

The Treasury would never agree to commission the fuel duty and VED comparison the hauliers wanted, because it would support their argument, and the hauliers wouldn’t agree to support our total tax burden and efficiency comparison because it would support ours.

  For a year, under successive ministers, that was the impasse. In the meantime, Gordon decided to scrap the fuel duty escalator, but pressed ahead with the annual inflation duty rise in Budget 2000, getting an unpleasant shock when The Sun’s front-page splash the next day said that – as a result – it would now cost £50 to fill a Mondeo.

  Nevertheless, there was not much hint of the trouble to come and, indeed, when John left the tax policy team and I became head of the indirect tax branch, we congratulated ourselves on a job well done. We’d taken the fuel duty rises as far as they’d go, we’d pushed through our reforms of VED and we’d held the line against the hauliers to the point where we barely needed to go through the motions at the Road Haulage Forum meetings.

  I was looking forward to getting stuck into the other aspects of the job – tobacco, booze, betting and VAT – if I got the job permanently, so I was gutted when it was awarded instead to a very bright girl named Katy Peters. Looking back, I can see the rationale: she was a highly regarded and experienced Treasury official, albeit with no tax background, rather than a Customs secondee in his first Treasury job; and whereas one senior manager used to tell me that my submissions to ministers were ‘economically obtuse’, Katy was a fully trained economist.

  I’d also offended some civil service sensibilities before the 2000 Budget by taking action that was deemed ‘political’. One morning, I put in my submission to the Financial Secretary Stephen Timms, known as ‘Ten-Foot’ for his legendary height, proposing the VED rates for new cars, set in bands according to their level of carbon emissions.

  That lunchtime, Ten-Foot’s office received a letter from the Ford motor company warning him that if one of the bands was set at a certain level, then production of a new car due to take place in the UK would be scrapped, with the loss of hundreds of jobs. Inevitably, that was exactly the level I’d just proposed.

  Rather than leave Ten-Foot – the nicest and most morally upstanding MP and minister I’ve ever encountered – to take a difficult decision, I simply went to his office, said I’d made a mistake in my proposals, and re-submitted them with the bands at the level that suited Ford. Even in Gordon’s Treasury, it was frowned on for a civil servant to engage in that kind of chicanery.

  Whether that cost me the indirect tax job, I don’t know, but my handover with Katy wasn’t the friendliest. Nevertheless, I did take her through the drill on the Road Haulage Forum, and we agreed she would shadow me at the next meeting in the early summer of 2000 to see how it all worked. It was the most desultory meeting we’d had up to that point, to the extent that I was representing Ten-Foot and my opposite number at Transport was representing his minister.

  As always, towards the end of the meeting, we went through the ritual of the FTA and RHA saying we needed a comparison of motoring taxes, the Transport official agreeing, and me nodding along but saying it was all very difficult because we needed to compare all operating costs and take a look at comparative efficiency. And that – for the umpteenth time – would have been that.

  Except it wasn’t. There was an interjection from behind my shoulder.

  ‘What we could agree’, said Katy, as though she’d just come up with a new map of Israel, ‘is to start with the comparison on motoring taxes, provided that we agree the next stage is to consider the wider comparative context.’

  If the room had been hit by an earthquake, more people couldn’t have fallen off their chairs. The RHA and FTA practically rushed for the door to release the news that we had finally conceded the study they wanted, each claiming credit for the breakthrough. Katy looked at me blankly, wondering what the problem was. Back at the Treasury, the firm view from ministers and the Eds was that this was a catastrophe, and the least bad option was to stick to our original position and accept the fallout that would result.

  Whether that was the right call or not, there was – in retrospect – a sickening inevitability about what happened next. The impasse had only lasted because neither side had ever blinked; there was no going back to it now. When Ten-Foot returned to the forum, and reverted to the normal script, the RHA walked out, said that there was no point continuing in discussions and that they would not blame any member associations if they now took direct action against the government.

  As the Tories, The Sun and the Daily Mail got behind the calls for a boycott of petrol stations in July 2000, the volatile atmosphere grew, and the militant local haulage associations who’d previously been kept in check by the RHA literally became a law unto themselves, blockading oil refineries in early September and causing panic-buying at petrol stations across the country.

  Back in Customs by now, working on VAT policy, I watched the evening news and saw the same hauliers that I knew by name and had kept reasonably onside for a year now acting and sounding like French farmers, demanding that Gordon cut diesel duty immediately or see the country shut down. I felt a bit of despair at all my good work gone to ruin, but also a bit of vainglorious schadenfreude that this was a consequence of that work going unrecognised.

  It’s a popular myth that the crisis ended when the newspapers that had helped to stoke it became fearful of the impact on the NHS and food stocks. But that was only once they’d also had clear guarantees from Gordon that – while he couldn’t be seen to give an emergency cut in fuel duty – he would definitely take action in a more orderly way in the Pre-Budget Report.

  That’s where I came in again. In October I was asked to come over to the Treasury for a meeting with Ed Balls. I’d hardly dealt with him while I was working on transport tax, which was never his brief, and our only proper encounter to that date was memorable for all the wrong reasons.

  He was working the room at the Budget party in 2000 and found his way to our small tax policy gaggle. He explained how he had to leave soon to get back to his young baby, and how difficult it was when he was working late nights on the PBR and Yvette had a late vote in Parliament. For some reason, I said: ‘You must need round-the-clock nannies.’ He gave me a filthy look: ‘Nannies? Nannies? They’re called our parents.’ He stalked off to the next group, and my colleagues winced.

  I was hoping he wouldn’t remember that when I walked into his office, but he barely looked up from his sheaf of papers. ‘What’s this one?’ he asked his private office official, and was told: ‘Fuel Duty – Damian from Customs’. ‘Ah right, welcome. How’s Customs? Now what we need for the day before the PBR is a twenty-page report, full of charts, making the principled scientific, environmental and economic case for cutting 3p off low-sulphur petrol and diesel, and explaining how everyone will benefit. I’m told you can do that for us.’

  ‘Erm, yep, sure, I think so.’ He looked at me. It was the ‘This is what we’re actually doing’ moment. ‘This is very, very important. We’re not going to let people say we’re cutting duty because The Sun told us to or some truckers blocked the roads. Otherwise they’ll just do it again. We’re doing it because it’s the right thing to do and it’s good for the environment. And I’m asking you to write the report because I’m told you know all this stuff. Are you with me?’

  ‘Yes,’ I said, much more robustly. ‘Right, you haven’t got long to do it, so sorry about that. But at least it means you’ll get an invite to the party.’ He gave a menacing chuckle. I left the office unsure whether that was a reference to what my old colleagues still called Nannygate, but after delivering the report exactly as required four weeks later, he shook my hand briefly at the post-PBR drinks and said sardonically: ‘I liked all your charts. Very, very good charts.’

  That PBR may have resolved the problem, and Gordon was always highly cautious with fuel duty after that, but the legacy remains from that period. Even taking into account the 3p reductions, duty on the main types of petrol
and diesel was left at 45.82p per litre on the eve of the 2001 election, compared to 36.86p when Labour took office in 1997: an increase of more than a quarter. Forget that the last Tory administration raised it at a far faster rate from 1993 onwards; what matters is the comparison with George Osborne’s decisions from 2010 onwards.

  Through his forgoing of the normal inflationary duty rises, a one-off 1p reduction in 2011, and some marvellous sleight of hand in terms of the timing of his duty decisions, George Osborne is able to go into the 2015 election having never once increased fuel duty, and indeed having cut it by one penny. Obviously it makes a mockery of his insistence on deficit reduction at all costs and the comparison ignores the 2010 VAT rise, which has arguably cost motorists far more over the years. Nevertheless, it makes for a potent contrast with Labour’s first term in office.

  If you’re standing by an election billboard, watch that space.

  7

  VAT MAN AGAIN. AND AGAIN

  If you’d told me the day I first picked up a VAT guide that the knowledge I gained would involve me in three of the most crucial decisions of Labour’s time in office, in 2002, 2008 and indeed – a year after my sacking – in 2010, I’d have yawned and said: ‘Sorry, what did you say? I lost you at VAT.’

  And that’s the reality: most people’s eyes glaze over when you start talking about VAT, so when I found myself in a senior position under Gordon, my colleagues and bosses were more than happy with me acting the resident expert, which was their flattering way of saying: ‘You get this stuff; just tell us what to do.’ And I always retained that status, hence being consulted even after my sacking.

  It didn’t come easy though. The great mystery of VAT is that, despite being all about everyday things – what we eat, drink and wear – the laws and language that surround their taxation are utterly impenetrable. Being a new boy in the Customs VAT team was like travelling to a distant country where every so often you’d hear an English phrase inserted into the otherwise indecipherable local dialect – ‘Spongy Texture’, ‘Stretchy Fabric’ and often an anguished cry of ‘Loophole’ – and wonder what on earth the rest of the conversation could be about.

  That was partly because I sat near one of the greatest of all civil service teams – the VAT Reliefs Unit. Every week, this team is sent a steady succession of new clothing, food and other products which businesses accept are on the borderline between what qualifies for zero or 5 per cent VAT on one hand and the standard rate on the other, then 17.5 per cent, now 20 per cent. Rather than wrongly start selling them at the lower rate and face a retrospective tax bill down the line, the manufacturers or retailers are looking for a favourable ruling up front.

  So it is that a group of VAT experts will spend a good part of their working week eating small foodstuffs and discussing among themselves whether the texture is more that of a cake or a biscuit, or pulling out the bust on a tiny T-shirt to decide if it should qualify as children’s clothing or is in fact designed for young women headed to Ayia Napa. And when not doing that, they are fighting case after case at tribunals, the High Court, the Court of Appeal and the European Court of Justice, often with hundreds of millions of pounds at stake, trying to close the loopholes and defend the borderlines.

  For that reason, the VAT establishment in general hate loopholes and hate the borderlines that create them even more. That is why, for years, they urged Gordon Brown, Alistair Darling and George Osborne in succession to start taxing Cornish pasties, sausage rolls and other zero-rated food sold hot over the counter in order to equalise their VAT treatment with takeaway pizzas, curries and so on. They finally got their way, albeit temporarily, in Osborne’s 2012 Budget.

  One example of this hatred of loopholes came early in Labour’s first term when Dawn Primarolo asked for advice on whether she could reduce the VAT rate on tampons, on the grounds that they were clearly essential for women and VAT should – where possible – not apply to essentials.

  She received an impossibly patronising reply explaining that it was a great myth that VAT did not apply to essentials. Try living life without toilet paper, toothpaste and soap, she was told, all of which carry VAT.

  Nevertheless, Dawn patiently explained in response that she was aware of all that, but had looked at the list of items to which EU member states were entitled to apply reduced rates of VAT and, while toilet paper wasn’t on there, sanitary protection clearly was, and given it was legal and affordable to do so, she would like to recommend it to the Chancellor for the Budget. The VAT bosses in Customs were enraged: ‘This bloody woman wants to create a new borderline – a new one!’

  Their next tactic was to argue that, since this would be the only VAT relief specific to one sex, it would introduce gender discrimination into a VAT system, which – unlike its direct tax cousins – had always been pleasingly androgynous. Dawn would have been forgiven for losing her patience at this point, but instead suggested that if the team could identify one item which was equally as essential but exclusive to men as tampons were to women, then she’d happily consider their argument.

  The subsequent, intensive brain-storming exercise at Customs HQ came up with two answers, presented almost with defiance in an email reply to Dawn’s office: beard-trimmers and Jewish circumcision knives. Needless to say, the measure eventually went ahead in 2000, although it remains that rare item, a tax cut not actually announced in the Budget, due to Gordon’s reluctance to refer to tampons at the despatch box. The same was true when he cut VAT on condoms in 2006, another initiative of Dawn’s.

  My grounding in this area and the work I’d done on the fuel crisis got me an invitation in late 2000 to a private meeting with the two Eds and Katy, who had found her feet after the screw-up at the Road Haulage Forum. Ed Balls began, ominously, by saying: ‘We are not having this meeting and we are not asking you to do any of the work you’ll be undertaking – anything you do will be your own research and thinking.’

  With that understood, they explained that they wanted someone to develop radical options for the ‘structural reform of VAT’, which boiled down to creating a new tier of reduced rates on certain goods and services, paid for by raising the standard rate to 20 per cent. They described this in shorthand as 0–5–10–20. They said they wanted two options at either end which would give away or raise in the region of £10 billion, and a mix of options in between.

  They continually repeated the importance of getting robust analyses of the distributional impact on pensioner households, low-income families and so on. When I tentatively asked what all this was geared towards, they just waved away the question, saying we were coming up to a new parliament and it was important to look at everything fresh.

  I worked on what was termed the ‘special VAT project’ for several months, and had a number of further meetings with the Eds. They were constantly hankering after new reduced rates which could make the system less regressive: ‘What would you cut VAT on if you wanted to target support to lower-income households?’ ‘Cigarettes and alcohol,’ I said. ‘But we can’t under EU law.’ ‘We can’t full stop,’ Ed Miliband replied, as if I was an idiot.

  ‘Alright,’ Balls said impatiently, rolling his pen in his hand, which is his equivalent of rolling his eyes: ‘What VAT cut can we do under EU law that will make the biggest difference to lower-income households?’ ‘The best option?’ I said. ‘Hands down the most progressive tax cut we could make? That would be 5 per cent VAT on pet food.’ ‘Pet food?!’ they both said. ‘Yep, compared to other options, there’s a hugely disproportionate benefit for pensioners and low-income families with kids. The distributional charts are fantastic.’ Now they were both looking at me as if I was an idiot.

  As time went on, they became less interested in the options for VAT cuts, and more in Option 4(iii) – the one which raised the maximum £10 billion, with minimal additions of new reduced rates, the standard rate raised to 20 per cent, and new housing taxed for the first time at 10 per cent. They pored over the distributional charts, and seemed
remarkably phlegmatic about how terrible the figures looked for low-income families and pensioners.

  My work was done and I was still none the wiser as to what it was all about, until the 2002 Budget when rates of national insurance contributions were raised to pay for a £10 billion increase in NHS spending. Some counterpart of mine in the Inland Revenue had clearly been doing a parallel ‘secret project’ on NICs, and – from what I could see – their proposals had beaten mine.

  But Ed Balls told me years later: ‘You will never know how important your work was. Blair was absolutely insistent we had to raise the money through VAT not NICs, but we saw him off, and it was all your distributional analysis that did it.’ So my special project had been a straw man all along: the worse the figures looked the better; and the less credible the potential ameliorative reduced rates were, the more that clinched the argument. Imagine how they enjoyed telling Blair about pet food.

  However, the work I’d done and the reputation I’d earned as a VAT expert would come back to the fore during the financial crisis after 2008.

  As many people lost their jobs and others started counting their pennies, and as companies went bust or retrenched, billions of pounds of potential spending was being lost to the economy, hence the steady slide into recession. At the same time, the surviving high street banks were all going through their own retrenchment and refusing to lend any more money.

  If the government had started cutting its own spending or increasing taxes at the same time, a bad situation would have become catastrophic. Instead, we tried to fill some of that void by increasing short-term government spending – albeit through increased borrowing – and the Bank of England did what it could through so-called quantitative easing to encourage the banks to lend.

  However, it’s also vital to try to arrest the slide in spending by households and businesses, and keep the real economy going. After all, the government and the Bank of England couldn’t save Woolworths; only actual people buying actual products there could do that. In that situation, a VAT cut is by far the most effective mechanism to give that ‘fiscal stimulus’ and I was one of those who argued most strongly for it.