Osborne’s financial pain begins as VAT hike hits

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.”

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: //bit.ly/ejKIBj writes Ben Fox

  2. Eleanor Besley

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

  3. salardeen

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

  6. Gavin Duff

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

  7. william

    If Ben Fox wants to see a Labour government next time,he has some work to do.The structural deficit was created by Brown, a Labour PM.Darling was committed to reducing it.The electorate know that.We, Labour, lost the election.The unusual alliance of the present government has AGREED on a deficit reduction plan.Slogans like ‘The wrong tax at the wrong time’merely emphasises the vacuum of policy since EM took over.Are you seriously suggesting that Labour fights the next election on a policy of higher CGT which will yield nothing,another banking levy,ditto, or higher income tax, and political oblivion?Can we have some reality, please?

  8. Stephen W

    So against a £13 billion VAT rise, your proposed alternative is doubling a CGT rise and Bank levy that have raised £3.5 billion.

    Even ignoring the marginal decrease on revenue, so doubling these taxes won’t gain another £3.5 billion. Where does the other £10 billion come from?

  9. Anon E Mouse

    Ben Fox – Happy New Year – glad to see you haven’t had a New Year’s resolution for being truthful, life would be so boring if you had.

    Your link to the Beer Association shows the VAT is on the 26% increase in two years under the last useless Labour government.

    The dithering (almost unintelligible at times – does he have a cold?)Ed Miliband says it is “The wrong tax at the wrong time.”

    So what’s the right tax Ben?

  10. Double.Karma

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

  11. Abaris

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

  12. Happy New Year? – What does 2011 hold for Dacorum? | I'm still red…

    […] is little doubt that this tax rise was both avoidable and will hit the poorest hardest (see here and […]

  13. matthew fox

    @ Anon E Mouse

    Can you calm down and be civil to people.

    One big flaw in the reason for the Vat increase, ie the deficit, is undermined by the fact that Osborne has made it crystal clear that the 20% rate is here to stay.

    If Vat is being raised solely because of the deficit, surely, if the government balances the budget, then Vat should be reduced accordingly.

    A bigger problem for the Tories, and the Lib Dems, is that they will have to start looking at levying Vat on Food or Energy.

    It seems the Conservative movement fails to remember, that Ken Clarke put 17.5% on gas and electricity, and it was Gordon Brown who reduced it 5%.

    The only dithering I see at the moment, is the Government’s failure to implement the ” Fair Fuel Stabiliser “. At 130p a litre, I am surprised it hasn’t kicked in.

  14. Elizabeth Eva Leach

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

  15. Anon E Mouse

    Matthew Fox – I’m perfectly calm – never anything but. It isn’t the first time you have made false statements about me and I still await my apology from one of your previous posts. Well?

    Clearly you don’t frequent this fine blog very often. If you did you’d be aware that the writer of this article may be better suited at openly writing fiction, something he is clearly good at.

    When did Osborne make it “crystal clear” that the rate of vat is here to stay? I listen intently to the media every day and heard him specifically state he wouldn’t discuss future taxation decisions on the Today Program.

    Same as Alistair Darling except under this government we don’t have Gordon Brown organising his bullies and thugs behind the scenes so the “Forces of Hell” won’t be “Unleashed” against the present chancellor.

    I feel WAY more civil than that bunch Matthew. Ask Peter Mandelson. Or Peter Watt. They know.

    Since you have based your next comment around your initial dishonest premise your post is speculative nonsense and since this is supposed to be an “Evidence Based” blog perhaps you would feel more at home at Labourlist.

    Finally your last remark about the Fair Fuel Stabiliser shows you haven’t even bothered to read the Coalition documents. Dishonest people like yourself do the Labour Party no favours.

    Obviously people like you aren’t as destructive to Labour as the useless, dithering Ed Miliband, the tax avoiding property millionaire but in fairness only 15% of his shadow cabinet actually voted for him so much as I’d like to, I can’t blame the PLP for that. Shame.

  16. scandalousbill

    Anon,

    You asked: “When did Osborne make it “crystal clear” that the rate of vat is here to stay?”

    If you consider this quote from Wednesday, 15th December 2010 in the Spectator’s Christmas interview with George Osborne
    //www.spectator.co.uk/coffeehouse/6546863/the-spectators-christmas-interview-with-george-osborne.thtml

    “The VAT rise is not temporary. It can’t be. We are talking about a totally different scale of revenue and the VAT rise is a structural change to the tax system to deal with a structural deficit.”

    Does seem to be pretty clear as to his intent on the VAT.

  17. Anon E Mouse

    scandalousbill – (I have no doubt that the rate is indeed here to stay) but he outlined the fact yesterday that he wouldn’t set any rates or discuss tax policy which is understandable.

    As far as I’m concerned that overrules anything previously stated – all governments do it – look at Labour and the tuition fees where they claimed that had legislated to prevent rises and then did. Situations are fluid.

    I would say though that if he needs to lower the VAT to possibly stimulate the economy I’m sure he will do and that’s why he won’t rule it out but as it stands it appears to be here to stay…

    I still don’t think that this is the way Labour should be attacking the coalition though. What exactly are the shadow cabinet doing all day? Why don’t they set a position to present as an alternative to this government instead of whatever is is they are doing because it clearly isn’t working.

    Labour should be way ahead in the polls with all these cuts and tax hikes…

  18. Nick Robinson

    Osbornes financial pain begins as VAT hike hits – //bit.ly/hEjovs

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