§ The measures that I have announced today maintain a responsible fiscal policy, while giving help to industry and families. They also include some important reforms to the tax system. However, my Budget would not be complete if it did not address one other issue, which has attracted a certain amount of attention recently.
§ My right hon. Friend the Secretary of State for the Environment will be annoucing very soon the conclusions of our review of local government. I do not propose to anticipate his statement, but there is one announcement I want to make today.
§ In January, we announced a £1 billion package to reduce the community charge for more than half of all charge payers. Since then, I have been considering whether the impact of local expenditure on the local taxpayer is too great for any system of local taxation to bear.
§ I have concluded that local taxes are being asked to bear too large a burden, and that the level of the community charge is still too high. However, if local taxes are to fall, and if the standard of local services is to be maintained, taxes elsewhere must rise.
§ I propose, therefore, to make a substantial switch from local taxation to central taxation. This will amount to about £4¼ billion in the coming financial year—1991–92—and will reduce the net yield of local taxation to about £7 billion. This large reduction in local taxation will take it to a level that the Government believe should be sustainable in the longer term.
§ We shall introduce a Bill in the next few days to authorise payments of extra grant to local authorities, and to ensure that community charge payers will reap the full benefit in reduced charges in the coming year—1991–92. The money will not be available to increase local authority spending. Domestic rate bills in Northern Ireland will be reduced as well.
§ The Bill will also ensure that charge payers do not have to start paying their charges until the new and lower charges have been introduced. Later today, my right hon. Friend the Lord President of the Council will make a statement about the arrangements for the Bill. The switch requires a substantial increase in central taxation. I have decided that this should be achieved by raising indirect taxes—that is to say, taxes on spending.
§ I am proposing, therefore, from 1 April to increase the standard rate of value added tax by two and a half percentage points to 17½ per cent. VAT is a broadly based tax which falls on consumers rather than producers. Since much consumer spending is zero-rated, it bears less heavily on poorer households than on the better-off, so raising VAT is not only an efficient but also a fair way to raise the necessary finance; and raising taxes on spending rather than taxes on income will be better for savings, and consistent with our strategy for tax reform, first set down by my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) in his 1979 Budget.
§ Raising VAT will increase some prices, but the reduction in the community charge will more than offset that effect, so the switch will actually reduce the retail prices index. As a result of these changes, the community charges recently announced in England, Wales and Scotland will be cut by £140. On average, the headline 181 charge will be reduced from about £390 to about £250 in both England and Scotland, and from about £260 to about £120 in Wales, while the amounts people actually have to pay, after allowing for relief and benefits, will fall I o under £175 in Great Britain. The charge in Shetland will fall to under £1.