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”
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
http://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.
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…
Nick Robinson
Osbornes financial pain begins as VAT hike hits – http://bit.ly/hEjovs