Might I suggest to the Treasury that instead of maintaining punitively high interest rates via the Bank of England, as the sole means of curbing consumer spending and hence of regulating inflation, the government should apply VAT to interest on borrowing. With an associated reduction in the actual base rate, this has the following properties :

Consumers (i.e. those not registered for VAT) would continue to experience a high interest rate in practice.

Businesses which can reclaim VAT would see the actual lower rate.

Foreign investors and speculators would see the lower rate.

These properties result in :

Reduced consumer borrowing

Increased business investment

Reduced upward pressure on the pound, allowing manufacturing and export industry to remain competitive

Significant government revenue may be raised, allowing reduction in taxes in other areas.

In practice, application of the currently prevailing rate of VAT (17.5%) to an actual base rate of say, 6.75% results in an apparent consumer base rate of 7.93% - a very helpful reduction in actual rates.

Updated 2 July 1998

18A Garway Road
London W2 4NH

Rt Hon Sir Nicholas Lyell QC, MP
House of Commons
Westminster
SW1A 2PW

2 July 1998

Dear Mr. Sir Nicholas,

My colleague Peter Baldock has come up with an ingenious solution to the problem of high interest rates: to put VAT on interest payments. He has written to his own MP, Simon Hughs, and I would like to ask you for your support for his proposal.

Peter’s proposal will help to keep consumer spending and inflation under control, while at the same time easing the upward pressure on the pound which will help our exporters.

If you need to reply, I can be reached for the time being at the above address.

Thank you in advance for your help.

Yours sincerely,