Rafe Fletcher is the founder of CWG.
Singapore approaches its annual budgets from an enviable position. The government is constitutionally required to balance the books over each five-year term, so tough decisions can be framed as necessary rather than cruel choices. And past prudence gives Singapore significant fiscal leeway. Investment returns from its sovereign wealth funds account for about a fifth of annual government revenue.
But strict adherence to the spirit of a generational contract means those drawdowns can’t jeopardise the continuing growth of those reserves. And the challenges of an ageing population mean it must increase its tax take without jeopardising the low-tax model that entices global capital.
In 2022, Singapore needed to raise an additional $3.5 billion annually. The options were to raise the top rate of income tax from 22 to 42% or increase its Goods and Services Tax (GST), the equivalent of Britain’s VAT, from 7% to 9%. It chose to do the latter while increasing that top income tax rate to just 24%.
That would be politically unpalatable in Britain, where the rhetoric of the broadest shoulders bearing the greatest burden dominates tax-and-spend discourse. Particularly as, unlike Britain, Singapore does not zero-rate this consumption tax on essential items. But, as Chancellor John Healey delivers his budget today, abolishing that zero-rate should be amongst any new measures.
It may look regressive. While higher-earners pay more in absolute terms, flat taxes exert a greater relative burden on lower-earners. A VAT example illustrates this. Assume that an affluent British household spends £10,000 on zero-rated groceries annually. It saves £2,000 in VAT. Compare that to a lower-income household which spends £3,000. It saves £600 in VAT. The nature of VAT-income ratios means the £600 saving is more substantial for the poorer household in relative terms.
So levying VAT comprehensively would have a greater impact on harder-up families and individuals. But Singapore looks at things differently. It sees a saving of £600 as an underwhelming return on foregoing £2,000 in revenue and thinks instead about how GST can be redistributive.
It is something that cannot be addressed at the point of sale. After all, unless HMRC’s recent outreach to Britain’s wealthiest extends to identifying them publicly, means-testing cannot take place at the checkout counter. Singapore provides a different solution in its GST Voucher (GSTV) scheme. Introduced in 2012, eligible households and individuals receive cash subsidies or credits against household bills, thus alleviating GST’s burden on lower earners. Where Britain’s zero-rating of VAT offers universal discounts, Singapore applies them selectively.
There would be vehement objections to implementing anything similar in Britain. One thinks first of the practicality. It is an additional administrative burden in a country that already has a complex system of benefits and tax credits. Managing further subsidies, and judging eligibility, is difficult enough already. And Britain has a far larger population than Singapore. But as Britain scrambles to meet day-to-day spending, it is better for the Treasury to collect tax at the point of sale and dictate redistribution, rather than allowing broad exemptions.
Britain could also follow Singapore in restricting its compensatory voucher scheme to citizens. The Conservatives’ muddled stance on immigration allowed lower-earning migrants to impose significant costs on public services without contributing equivalent sums in taxation. While it’s infeasible to levy different income taxes on foreigners, some balance can be restored by prioritising British workers when it comes to VAT.
Nonetheless, inflating the price of everyday goods is bound to be an unpopular measure in the midst of cost-of-living concerns. And the most recent attempt to change VAT’s applicability in the form of George Osborne’s “pasty tax” was so badly received that it was quickly shelved. But the inevitable uproar could be diffused through gradualism. By widening VAT’s scope, Britain could at first lower VAT rates. The ICAEW argues 18% would be sufficient to raise extra revenues while offsetting the total annual VAT payable by households in the lowest four income deciles.
This still leaves the question of why conservatives should be arguing for higher taxes at all. Changing Britain’s VAT regime would not only worry low earners but the so-called HENRYs (High Earners, Not Rich Yet). Ostensibly affluent families perhaps earning six-figures yet already burdened by a tax regime that punishes aspiration.
So of course, I’d rather offer a utopian vision that looks at Singapore and wonders why we can’t have balanced budgets and far lower taxes across the board. But one must be realistic about Britain’s context. Because despite Rachel Reeves’ pledge to stop borrowing for day-to-day spending by 2029-30, and praise from the IMF around those optimistic projections, the last six months show little sign of an imminent turnaround. Britain borrowed £98 billion from April to September, and just 35% of that was spent on investment.
The Economist estimates that zero-rated VAT on items like clothing and food cost the state £70 billion a year. Abandoning it will not suddenly make the Treasury that much richer. It will likely affect spending and the concurrent introduction of a rate cut and voucher scheme would eat into the surplus further. But raising even half that sum would make Reeves’ pledge look less of a pipedream.
It is often said that Britain demands European levels of welfare with American levels of taxation. Conservatives have all been all too happy to encourage that delusion. Changing it requires a steady adjustment of the Overton window. And abolishing zero-rated VAT is one way to start. Accompanied by something like Singapore’s GSTV, it prioritises British workers and its burden is still borne by society’s wealthiest. It is better than looking for new ways to squeeze their incomes and capital, and risk further flight.
So, assuming the cause is not taken up by John Healey today, the Conservatives should be brave and revisit their former Chancellor’s brief foray into the VAT ring. Not only as a testament to the fiscal responsibility that Labour forgets, but to show such measures are the necessary consequences of the tax-and-spend state Britain demands.