Lib Dems set to support regressive Tory VAT increase

A BBC survey of economists reports that they expect value added tax to rise from 17.5 to 20 per cent.

A BBC survey of economists reports that they expect value added tax to rise from 17.5 to 20 per cent and the Telegraph reports that Robert Chote of the Institute for Fiscal Studies predicts that this will be in the summer Budget. If true, this news sets the first test of the coalition’s claims that they are going to “protect those on low incomes from the effect of public sector pay constraint and other spending constraints”; but how will the living standards of people living on benefits be protected?

Older readers will remember that one of the first things the last Tory government did was to raise the standard rate of VAT from 8 to 15 per cent. Last year, when the Labour Party predicted a Tory government would raise VAT to 20 per cent, Andrew Lansley insisted there was “absolutely no such plan” and William Hague said there were “no plans in existence” – though he refused to rule it out.

There are a couple of points to note about raising VAT. One is that increasing taxes threatens the recovery just as much as cutting spending – both take demand out of the economy at a time when growth is well under 1 per cent. I suppose you could say we’ve just fought and lost an election on that point, so there’s a limit to how successfully this horse can be flogged.

But it is interesting that the Liberal Democrats – who were on the right side of this argument, unveiling a poster during the election campaign attacking the ‘Tory VAT bombshell’ – seem to have abandoned it without too much fuss.

The other concern is the impact of VAT increases on poverty and inequality. Compared to raising direct taxes like income tax, increases in indirect taxes like VAT have a much bigger impact on people with low incomes. As the Office for National Statistics has pointed out, direct taxes are progressive; they “contribute to a reduction in inequality”. Indirect taxes, on the other hand:

“Have the opposite effect to direct taxes taking a higher proportion of income from those with lower incomes, that is, they are regressive.”

If we divide the country by income into quintiles (fifths), income tax accounts for 3.2 per cent of the income of the poorest quintile, but 18.4 per cent of the income of the richest. VAT, on the other hand, accounts for 10.8 per cent of the income of the poorest quintile but just 4.5 per cent of the income of the richest.

If there are no measures to balance this impact, an increase in VAT will make inequality worse. It will also deepen poverty – VAT accounts for over 7 per cent of the spending of people in the bottom quintile, with no other source of income than benefits they will have few alternatives to cutting already low levels of spending when prices rise.

The most worrying thing of all is that there has been no mention in any news story of an increase in benefits and tax credits to protect the poorest. The last Conservative government actually froze benefits when it was trying to cut public spending and Robert Chote has warned that the coalition agreement:

Leaves open the option of tougher action to cut social security spending.”

Both parties in the coalition government claimed to be pro-poor in the election. The Liberal Democrats have made this claim longer and more convincingly than the Conservatives, so I suppose the onus of responding to this criticism lies most heavily on them. Will they promise not to cut or freeze benefit rates? And will they commit to increasing benefits and tax credits to compensate for any increase in VAT?

40 Responses to “Lib Dems set to support regressive Tory VAT increase”

  1. lukewaterfield

    RT @shamikdas: Another Fib Dem u-turn: RT @leftfootfwd: Lib Dems set to support regressive Tory VAT increase: http://bit.ly/aFWmvc

  2. LM

    RT @shamikdas: Another Fib Dem u-turn: RT @leftfootfwd: Lib Dems set to support regressive Tory VAT increase: http://bit.ly/aFWmvc

  3. Jess Elliott

    @j_shirtcliffe you need to get your boys under control RT @leftfootforward LDs to support regressive Tory VAT increase: http://bit.ly/aFWmvc

  4. Robster

    RT @leftfootfwd: Lib Dems set to support regressive Tory VAT increase http://bit.ly/aFWmvc

  5. Lee McIvor

    VAT – a tax on the poor: "Compared to direct taxes, increases in VAT have a bigger impact on people with low incomes" http://bit.ly/VAThike

  6. Jane Ayres

    RT @Left Foot Forward Lib Dems set to support regressive Tory VAT increase: http://bit.ly/aFWmvc < (predicted increase to 20%)

  7. House Of Twits

    RT @leftfootfwd Lib Dems set to support regressive Tory VAT increase: http://bit.ly/aFWmvc

  8. Shamik Das

    Another Fib Dem u-turn: RT @leftfootfwd: Lib Dems set to support regressive Tory VAT increase: http://bit.ly/aFWmvc

  9. Juderobinson

    RT @leftfootfwd: Lib Dems set to support regressive Tory VAT increase: http://bit.ly/aFWmvc

  10. Ben Cooper

    RT @leftfootfwd: Lib Dems set to support regressive Tory VAT increase: http://bit.ly/aFWmvc #ConDemNation

  11. StephenH

    Comments on the Guardian website (CIF) by LibDems are instructive– ‘oh never mind all this tax, welfare, and economics stuff (yawn!….) — we are getting rid of ID cards.’

    Shallow shallow shallow.

  12. Jared Gaites

    RT @houseoftwits: RT @leftfootfwd Lib Dems set to support regressive Tory VAT increase: http://bit.ly/aFWmvc

  13. Joe Otten

    This is fairly meaningless unless you can tell us by comparison where you would find £80 billion of deficit reduction.

    Otherwise the ultimate responsibility for any tax rises falls on the government that borrowed and spent that money, i.e. the last one.

  14. aaron

    VAT is not regressive, read JK Galbraith’s ‘The Affluent Society’ – it is a tax on unneccessary consumption, it incentivizes saving and any tax on consumption is better than one on production. And no I’m not a Tory, I’m a Labour member – ecologically VAT is incredibly progressive.

  15. Guido Fawkes

    So will you lot be lining up in a popular front with me and Matthew Elliot from the Taxpayers’ Alliance?

  16. StephenH

    “is a tax on unnecessary consumption, incentivizes saving and any tax on consumption is better than one on consumption”

    If you want to tax unnecessary consumption then raise targeted duty on things you wish to see less of tobacco, petrol, air travel, high alcohol cider, whatever.

    If you want to tax a larger percentage of wealth from the poor than the rich then introduce an indiscriminate VAT increase- as in the real world the poor spend almost all their income– and most of that on essential ‘consumption’.

  17. Anthony Zacharzewski

    I also would be unsurprised to see VAT exemptions also removed, from books and perhaps also from children’s clothes or even food. We have relatively wide VAT exemptions compared to other countries, and changing that would take VAT from a relatively regressive tax to a very regressive tax.

  18. Lady J

    WoW! iTS THE 80’s creeping back again. The British People once again will rue the day they bring back the Tories and the Lib-Dems will loose the progressive votes.

    Guys, please note; the best way to treat the Trolls on this site is to ignore their posts as if it was not written in the first place.

  19. Jan Sroczynski

    Unmarried mother with 7 children by 4 different fathers on £40k annual benefits – thats what has to be paid for & thousands more like her.

  20. Duncan Stott

    Attacking the Lib Dems for a hypothetical situation? Oh please.

    You could just have easily written an post entitled “Lib Dems set to block regressive Tory VAT increase”.

    How about waiting to see what actually happens.

  21. Katherine

    So economists predict VAT needs to rise, no one in either part of the coalition has said they want it to, and there has been no conversation with the LDs to get a response to a survey of entirely independent people. Is this not the same as someone asking, say, me if I think the NHS needs and IT system; I say yes and you report it as LibDems set to support Connecting for Health despite having campaigned against it? Naughty. Not saying it won’t happen – but right now this is specious reasoning at best.

  22. Anthony Zacharzewski

    Really, Jan? Let’s run those numbers.

    Census 2001 says there are 233,393 lone parent families with three or more children. Of course some of them will be the kids of merchant bankers where daddy has run off with a trophy wife, so let’s reduce that by the poverty rate in lone parent families (50%), which takes us to 116,697.

    Given seven children in a household is very unusual, let’s say that five percent of that sample have seven children, which is probably a huge exaggeration. That’s about 6,000 families across the UK.

    Remembering that’s probably a huge overestimate, let’s add that to your own huge overestimate of how much money they get. £40k per year for 6,000 families makes £240m. You can’t cut off every penny they get, or they’d starve to death, so let’s say you cut their benefit by 10%, saving £24m. That’s about two thousandths of the MONTHLY budget deficit every year.

    Great deficit reduction plan, have you told the Treasury?

  23. Demontrout

    The Tory-Lib expected VAT hike is regressive – meaning it'll hurt the poor the most and increase inequality > http://bit.ly/dfg7ZY

  24. Carl Hunter

    RT @leftfootfwd: Lib Dems set to support regressive Tory VAT increase: http://bit.ly/aFWmvc

  25. Mike Bell

    Clegg and Co have shown they are just Tories in yellow ties. Many of their supporters will be feeling they’ve been conned by a bunch of self serving opportunists.

  26. Elaine

    I hope someone has saved/cached all LD policy papers, ads, national and local manifestos, etc. before they disappear.

  27. blogs of the world

    It's going to be a big weekend, with the Jordan Retro VI Lakers hitting Saturday at Foot L… http://reduce.li/fdaxhh #foot

  28. SadButMadLad

    @Anthony Zacharzewski

    So you’re ignoring all the families with 6 kids, and the families with 3 kids and the huge number of families with 2 kids. All these get benefits too. It all adds up you know.

    So you are totally and utterly in favour of a family with two parents, 9 kids, and £42K/yr benefits deciding not to work because it’s more lucarative and driving around in two cars including a merc. Admittedly there are the extreme end of the scale. However you would probably state that it’s their human right to have that many kids and they need to be supported by the state (or in other words you and me).

    Anyway, you’re so fixated on supporting your benefits culture that you don’t understand hyperbole.

  29. Robert

    They’ll be more subtle.

    How else will they secure the second term?

  30. carlos_b

    You are incorrect. The British VAT regime is *not* regressive. Of course, direct taxes on higher incomes would be an alternative. But both have wide-ranging economic consequences, and the total impact on those with low incomes is not simple in the way you suggest (for purely political purposes). The most punitive regressive taxes on low income families are those on petrol, vehicles (road fund) and TV reception (licence fee) – but I don’t hear anyone on the left arguing to change those.

  31. Baker's Dozen » Blog Archive » VAT is the problem?

    […] VAT is a prospect that has been met with resistance from the left. Richard Exell of the TUC argues on Left Foot Forward that increasing VAT to 20% would be regressive and should be […]

  32. Anon E Mouse

    If this shows the levels of intelligence of employees at the TUC it’s no wonder union membership is at an all time low.

    VAT is not regressive any more than Labour are progressive…

  33. Mr. Sensible

    Do those business leaders, including the retailers, still support scrapping the NI increase?

  34. Look Left – The Week in Fast Forward | Left Foot Forward

    […] Among the most tweeted trends this week are: • The Lib-Con coalition; […]

  35. Anon E Mouse

    Lady J – Your comment; “Guys, please note; the best way to treat the Trolls on this site is to ignore their posts as if it was not written in the first place” – displays the arrogance that just gave the Labour Party is worst election result in decades.

    Mercifully Gordon Brown and his cronies have been prised out of Downing St and the superior metropolitan tone you use and the way you advocate the closing down of debate or engaging with anything you disagree with displays the very worst aspects of the Labour Party.

    Having just watched both Ed Miliband and Ed Balls on the BBC recommending the need to LISTEN to the people, may I suggest you do the same. Please keep your tribal views to yourself or go and join The Socialist Worker’s Party because opinions like yours are now against the mainstream and are really not helpful. Labour is in opposition now.

  36. Simon

    When Thatcher doubled VAT, that was in accordance with an EU Directive. The EU mandates that all member states levy VAT of at least 15% on non-essential goods.

  37. The Government must hold its nerve on Capital Gains Tax | Left Foot Forward

    […] or reinvestment. And an increase in VAT hurts the poorest disproportionately, where an increase can materially reduce the purchasing power of those on the lowest […]

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