If a minority Tory or Con-Lib dem government comes to power next week the worst possible thing they could do is deploy the infamous “it’s worse than we thought” ploy. This is the political trick used by Opposition parties to deny the need to do things like put up taxes before an election, but as soon as they get in to say “sorry people, but we’ve now seen the books and its worse than we thought and although we said we wouldn’t we now have to put up taxes (VAT)”.
That is not to say I don’t think any government should put up taxes – my view is the best way to deal with the fiscal problems is to spread the pain around as much as possible, between taxes and cuts, and over time. Labour was rightly criticised for not “fixing the roof whilst the sun was shining”. But we’re in danger of making the opposite mistake of using the rook beams to keep the fire going in a cold winter. A civilised society and modern economy needs decent public services to function properly – even the all-hallowed “markets” need a healthy and well-educated workforce, not to mention a well functioning administrative and legal system, to work. So yes, we might need to put VAT up.
But to say “its worse than we thought” in the current febrile European and international financial climate would be a disaster. The financial markets are being irrational enough without giving them more cause to be paranoid. So if you have to put up VAT – or anything similar – just say “we’ve changed our policy” and not “it’s worse….” – or it very soon will be worse than you thought.
One of the key differences between Britain and Greece is that we have a public administration and public finance system that mostly works. When we set spending targets, we can mostly deliver them (up or down) within reasonable tolerances. When we change tax rates, we can mostly collect them. When we say our deficit is “X” it usually is “X” and not, as in Greece, Y or Z. So to say “it’s worse than we thought” – implying our transparent and competent public finance system isn’t – would be a really serious mistake.
(By the way – I spoke at the Association of Corporate Treasurers conference here in Manchester recently and I couldn’t find a single finance bod who didn’t think VAT would go up after the Election – so you don’t need the ‘it’s worse’ ploy anyway).
STATECRAFT - improving government 
On the recent Election Uncovered tv programme, Portillo suggested a public sector pay freeze would be a relatively easy item to help restore the public finances. How many billions would this represent?
You mention increasing the rate of VAT but what about extending its scope, as well? I think other EU countries (Sweden?) charge VAT on nearly all goods and services – including food, children’s clothes, and newspapers. If the UK did the same, how much would this raise?
Well, I was right about this – see the Financial Times (18/05/10):
“Chancellor George Osborne’s comments in a Financial Times interview about finding “various skeletons in cupboards” and the “irresponsibility” of the previous government spooked the markets, which have been particularly jumpy about the accuracy of public finances since Greece massively restated its budget deficit last year.
Investor reaction underscored how the political temptation to blame Britain’s fiscal problems on the previous administration risks provoking turmoil in the financial markets.”
Mr Osborne is going to have to learn that knock-about politics is one thing, spooking the markets is quite another – as Chancellor he’s going to need to be a lot more careful.