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”
Gavin Duff
RT @leftfootfwd: Osborne’s financial pain begins as VAT hike hits: http://bit.ly/ejKIBj writes Ben Fox
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?
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?
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?
Double.Karma
RT @aaronjohnpeters: RT @leftfootfwd: Osborne’s financial pain begins as VAT hike hits http://bit.ly/e17gAD