VAT rise could stimulate short-term demand
If so many economists and retailers are so certain that VAT is to be increased, how come the politicians forgot to mention it during the general election campaign? With a budget deficit of £165bn, however, it seems just too easy not to squeeze spenders a little harder.
Even the International Monetary Fund has urged the UK government to increase its Vat take. It suggests tightening up on fraud and extending the coverage by exempting fewer goods, but the political flak from taxing food or children’s clothes makes it much more likely that a desperate government will simply raise the rate. Even loyal Tory newspapers would revolt at the prospect of a tax on their cover price and widening the scope would bring in lots of businesses that currently escape the complexities of Vat.
Raising the rate from 17.5 to 20 per cent would bring in £10bn however, with a rise to 22.5 per cent adding as much again, taking the annual yield to £100bn. Can the new chancellor afford not to consider such a windfall, whatever he said or avoided saying before the election?
Britain’s current rate is lower than every major EU country other than Spain and Luxembourg and well below the 25 per cent of nations like Denmark and Norway.
Vat replaced the purchase tax on luxuries nearly 40 years ago and has steadily become more important to state finances. Last time the UK had a hung parliament in the 1970s, Vat was levied at 8 per cent and income tax was 35 per cent: one has fallen as the other rose. And Conservative governments have form for increasing Vat: the rate was almost doubled to 15 per cent when Mrs Thatcher become prime minister in 1979 and increased to 17.5 per cent in the 1991 recession.
A tax on spending has its advantages; it catches people who avoid income taxes, for instance and encourages saving. But the time to raise the UK’s rate was during the consumer boom, dampening demand while closing the budget deficit and even repaying national debt. Raising rates now would risk returning the economy to recession. It would have exactly the opposite effect of Alistair Darling’s policy of cutting Vat to stimulate demand during 2009.
However, if the chancellor indicated now that Vat would rise from, say, February 2011, he could generate a mini-boom in the economy as people bring forward purchases to beat the increase. It could have the same effect as Darling’s cut without the cost. It would also appease retailers, giving them time to adapt and allowing them another Christmas before rates rise.
It all looks just too easy to increase Vat – with the blame attached to the last Labour government, of course. But if it is all so obvious and if retailers are so resigned to it, how come the politicians forgot to mention it before people voted?
