Osborne’s VAT increase: regressive and avoidable

George Osborne’s decision to raise VAT to 20 per cent from January 2011 has been widely described as regressive, including by the new Head of the Office of Budget Responsibility Robert Chote. Mr Chote has also emphasised the extent to which raising VAT was not unavoidable, and was in fact a choice made by Mr Osborne.

George Osborne’s decision to raise VAT to 20 per cent from January 2011 has been widely described as regressive, including by the new Head of the Office of Budget Responsibility Robert Chote.

Mr Chote has also emphasised the extent to which raising VAT was not unavoidable, and was in fact a choice made by Mr Osborne:

“When Mr Osborne said that ‘the years of debt and spending’ made the £13 billion increase in VAT unavoidable you might just as well say it was his desire to cut other taxes that made it so.”

The Chancellor’s decision to raise VAT should come as no surprise; it has been the preferred tax of Conservative Chancellors the past forty years.

When VAT was introduced, by a Conservative government in 1973, it was set at 10 per cent. Geoffrey Howe, despite promising not to “double VAT” in the 1979 election campaign, raised it to 15 per cent. It was then increased to 17.5 per cent by Norman Lamont.

In the 37 years since its introduction, VAT has risen from 10 per cent to 20 per cent. Meanwhile the basic rate of income tax has fallen from 30 per cent to 20 per cent.

This shift from raising revenue through progressive income tax to raising it through regressive indirect taxes was one of the hallmarks of the last Conservative Government.

Taxation-since-1978-79

When Mrs Thatcher came to office in1979, 39 per cent of revenue came from direct personal taxes and only 33 per cent from indirect taxes. By 1996/97, the proportion of revenue raised from direct taxes had fallen to 35 per cent and that from indirect taxes had risen to 37 per cent. Between 1997 and 2010, more revenue was raised from direct taxation than indirect taxation in every year.

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