Osborne’s financial pain begins as VAT hike hits

Green Politics

Despite the patently dishonest claims by the Tories that the VAT rise is progressive, it will, as the IFS says, hit the poorest hardest - particularly families.

Six months after George Osborne’s Budget announced that VAT would increase from 17.5 per cent to 20 per cent, raising more than £12 billion and accounting for over three quarters of the Budget’s total tax rises, it has finally arrived. And, like a problem that you hope will go away, the press has predictably reacted as though the tax rise is a surprise, with even the front-page of the Tory-supporting Times telling readers that it will “cost families £600 per year” (£).

Despite the patently dishonest claims by the Tories that their fiscal diet of tax rises and spending cuts is ‘progressive’, the VAT rise will, as the Institute for Fiscal Studies indicated back in June, hit the poorest hardest, particularly families.

Indeed, the prime minister himself, at a ‘Cameron Direct’ meeting in Exeter in May 2009, said:

“You could try, as you say, to put it on VAT, sales tax, but again if you look at the effect of sales tax, it’s very regressive, it hits the poorest the hardest. It does, I absolutely promise you. Any sales tax, anything that goes on purchases that you make in shops tends to…

“If you look at it, where VAT goes now it doesn’t go on food obviously but it goes very, very widely and VAT is a more regressive tax than income tax or council tax.”

It will also hurt small businesses. The Federation of Small Businesses (FSB) has released a survey showing that two thirds of small businesses expect the rise to limit their turnover, with most either passing the rise straight on to customers or cutting staff numbers.

Indeed, the British Beer and Pub Association has warned that the VAT rise will lead to 8,800 job industry job losses as well as a rise in pub closures as people buy in bulk from supermarkets rather than in pubs. The retail sector has also expressed concern about the effect of the tax rise on the economy.

The FSB has demanded Mr Osborne reduce VAT back to 17.5 per cent as soon as possible, while the Centre of Retail Research has claimed that retail sales during the first quarter of 2011 will fall by £2.2bn, leading to doubts that the VAT rise will raise the extra £13bn of revenue that the Chancellor is today claiming it will. With the pre-Christmas weather having weakened spending in December, there seems to be a consensus that retail spending will be lower than expected.

Unsurprisingly, Mr Osborne has demanded to know where Labour would have found the £13bn that he claims the VAT rise will deliver. As Left Foot Forward and numerous eminent economists have argued, instead of opting for a 77:23 split of spending cuts and tax rises, the Conservative-led government could have spread the burden of tax rises more fairly by increasing its bank levy or increasing capital gains tax to the 40% bracket rather than 28% which means that a multi-millionaire beneficiary of capital gains will pay less tax than someone on earning £35,000.

Both the bank levy and the CGT rise are estimated, in the Budget red-book, to raise a combined total of around £3bn. Instead, they are opting for a massive fiscal retrenchment which, as The Economist has pointed out, has tended not to work as effectively as a more equitable and less aggressive combination of tax rises and spending cuts.

There is no doubt that increasing VAT has proved to be an effective tax revenue creator in the past. However, the attitudes of the retail sector indicate that this time it may deliver much less cash than the government expects. Moreover, at a time when Britain’s economy remains weak, with growth forecasts for Quarters 3 and 4 of 2010 and 2011 having been revised down, the regressive nature of the tax and its stifling of consumption means that this VAT hike is, as Ed Miliband said today:

“The wrong tax at the wrong time.”

No related posts.

18 Responses to “Osborne’s financial pain begins as VAT hike hits”

  1. Kevin Matthews

    RT @leftfootfwd: Osborne’s financial pain begins as VAT hike hits: http://bit.ly/ejKIBj writes Ben Fox

  2. Eleanor Besley

    RT @leftfootfwd: Osborne’s financial pain begins as VAT hike hits http://bit.ly/e17gAD

  3. salardeen

    RT @leftfootfwd: Osborne’s financial pain begins as VAT hike hits: http://bit.ly/ejKIBj writes Ben Fox

  4. Éoin Clarke

    There is a very serious issue here…

    VAT attacks the infirm, aged and impoverished distpropoartionately more as a result of their already low income than it does any other social categories…

    And yet, upon annoucing a rise in VAT to 20% in his June 22 Emergency budget Osborne scored a 2% rise in blues voting score..

    we need to be much more imaginative about how we critique this VAT rise…

    children’s fruit drinks and cereal bars in included under 20% VAT.. as is a child’s busfare to school… their footwear is taxed at 20% from the size of 6 [my son’s is size 4 and he is 9].. if you have a few children these costs add up… children’s pocket money is taxed at 20% since they are likely to buy games and toys..

    The fish and chip dad brings home for the family on friday’s is taxed at 20%..

    Critique the VAT rise for what it is… it is a Tax on children

  5. Aaron Peters

    RT @leftfootfwd: Osborne’s financial pain begins as VAT hike hits http://bit.ly/e17gAD

Comments are closed.