Free The Downing Street Years by Margaret Thatcher

billion (a figure we felt we could fund and afford) would require an increase in the two rates of VAT of 8 per cent and 12.5 per cent to a unified rate of 15 per cent. (The zero rate on food and other basics would be unchanged.) I was naturally concerned that this large shiftfrom direct to indirect taxation would add about four percentage points onto the Retail Price Index (RPI).
    This would be a once and for all addition to prices (and so it would not be ‘inflationary’ in the correct sense of the term which means a continuing rise in prices). But it would also mean that the RPI, by which people generally measured living standards and all too frequently adjusted wage demands, would double in our first year of office. * I was also concerned that too many of the proposed public spending cuts involved higher charges for public services. These too would have a similar effect on the RPI. I recalled at my first budget meeting with Geoffrey that Rab Butler as Chancellor in 1951 had introduced his tax cuts gradually. Should we do the same? Geoffrey stuck to his guns. We went away to consider the question further.
    At our second meeting we decided to go ahead. Income tax cuts were vital, even if they had to be paid for by raising VAT in this large leap. The decisive argument was that such a controversial increase in indirect taxes could only be made at the beginning of a parliament, when our mandate was fresh. If we waited, hoping that either economic growth or cuts in public expenditure would do the job for us, we might never achieve the structural shift needed to boost incentives. We must establish the direction of our strategy from the start and do it boldly. By the end of that second meeting the shape of the budget which Geoffrey Howe announced on 12 June had effectively been set.
    It was generally agreed to be a dramatic reforming budget even by those opposed to us, like the
Guardian
newspaper, which described it as ‘the richest political and economic gamble in post-war parliamentary history’. Its main provisions followed closely our discussions at the end of May: a cut in the basic rate of income tax from 33 to 30 per cent (with the highest rate cut from 83 to 60 per cent), tax allowances increased by 9 per cent above the rate of inflation, and the introduction of a new, unified rate of VAT at 15 per cent.
    Apart from the budget’s big income tax cuts, however, we were able to reduce or remove controls on a number of areas of economic life. Pay, price and dividend controls had gone. Industrial DevelopmentCertificates, Office Development Permits and a range of circulars and unnecessary planning controls were also removed or modified. (Geoffrey Howe’s second budget in 1980 was to announce the creation of Enterprise Zones, where businesses could benefit from tax breaks and rate exemption to attract investment and promote employment in run-down areas.)
    But I took greatest personal pleasure in the removal of exchange controls — that is the abolition of the elaborate statutory restrictions on the amount of foreign exchange British citizens could acquire. These had been introduced as an ‘emergency measure’ at the start of the Second World War and maintained by successive governments, largely in the hope of increasing industrial investment in Britain and of resisting pressures on sterling. The overwhelming evidence was that they no longer achieved either of the objectives previously expected of them (if in fact they ever had done). With sterling buoyant and Britain beginning to enjoy the economic benefits of North Sea oil, the time had come to abolish them entirely. They were duly removed in three stages — some at the time of the Budget, a few others later in July, and the remainder in October (with the temporary exception of controls relating to Rhodesia). The legislation itself stayed on the Statute Book until 1987, but no further use was made of it. Not only did the ending of exchange controls increase the freedom