VAT

If you lie down with dogs…

If you lie down with dogs there’s a good chance you’re going to get up with fleas. With that in mind, I don’t suppose I should be in the least bit surprised at the nature of this week’s Budget, not least the inclusion of the Tories’ favourite tax, VAT.

I’m also fully aware of the nature of coalition. There are those who express surprise at the amount of Lib Dem election manifesto commitments which have either disappeared or been completely reversed, but I guess these people haven’t grasped the concept of being the junior partner in a coalition. The Tories have the lion’s share of the seats and so the government’s agenda is basically theirs with a few added Lib Dem bells and whistles (movement towards a £10,000 tax allowance, for example, or a referendum on limited voting reform).

But I still can’t get past the thought that the price of these noble policy aims has been to accept a regressive Budget from a Chancellor who clearly doesn’t give a damn about those less well off than himself (in other words, most of the rest of us). I deliberately didn’t post in the immediate afterscorch of the Budget for fear of bursting out with a purely emotional response to its provisions, but three days on and my view of it is pretty much the same.

I can accept some of the cuts for the simple reason that as a country we can’t simply keep on spending money we clearly don’t have. Contrary to what the Labour Party will tell you, running a massive deficit is not a progressive policy because someone will have to pay for it in the end and the longer we wait the more it will cost, both in terms of cash and public services. That said, there has to be a balance between controlling spending and making sure such cuts don’t damage the wider economy. I think the nature and timing of the cuts will put the economy at serious risk and that the coalition has taken this leap for ideological rather than pragmatic considerations.

Inevitably part of the ‘medicine’ comes in the form of increased taxation, but here is the most glaring case of Tory ideological fingerprints all over the Budget. (I know I’m running the risk of turning this blog into a continual rant about VAT but I really do believe it is a most unfair revenue-raiser which disproportionately punishes those who can least afford it.) I think I could probably have lived with much of the remainder of the Budget had the Chancellor looked towards Income Tax as his source of increased revenue, but that was never going to be on the cards. Throughout the campaign the guarded comments of both George Osborne and Alistair Darling can have left no one in any doubt that, whichever of them was Chancellor, they would look to VAT to balance the books. What has been surprising is how meekly the Lib Dems, who rightly spoke out against the tax during the election, have allowed the rise to 20% to be nodded through.

I can’t pretend I’m happy about the Budget (or the coalition for that matter) but none of that stops me being a Lib Dem, albeit on the progressive social democrat wing of the party. I’m also relieved to have an excellent local Lib Dem MP (Dan Rogerson) rather than a Tory alternative. I’m certainly not going to jump ship – Labour are, let’s not forget, the authoritarian, warmongering joke that helped get us all into this mess in the first place – but equally I have no intention of being an unquestioning apologist for the coalition. I will happily applaud them when they do well, and there is already much they can point to, particularly in the area of civil liberties. But I’m no longer prepared to stay silent when they indulge in the morally indefensible, as they did this week with Osborne’s Budget.

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Ed Balls: dishonest or delusional?

Ed Balls is right. As he wrote on Thursday, an increase in VAT would be unfair to the poorest and damaging to jobs and the economy, and the coalition will be making a big mistake if George Osborne’s budget includes such an increase.

Balls has said, in an email to Labour Party members, that “Raising VAT is hugely unfair. The VAT rise will hit the poorest households harder than the richest and will hit pensioner couples and ordinary families hardest of all. It is simply not right.” His parliamentary question, tabled ahead of the Budget, asking for the distributional impact of a VAT rise is a smart political move which gets to the very heart of why VAT is wrong, and his stance on this issue has helped to set him aside from the other candidates in the Labour leadership contest.

But does he honestly think that if his great mentor, Gordon Brown had won the General Election Labour would not have increased VAT? Ever since 1992 Labour have been terrified of increasing the headline rate of Income Tax – clearly the fairest way of raising revenue – and all the evasions during the election campaign clearly pointed to a VAT hike as their preferred tool for dealing with part of the deficit. Yes, Alistair Darling – rightly – increased the top rate to 50% in his 2009 Budget, but this can clearly be seen as the act of a dying government which had suddenly found a lost reserve of courage. It certainly wasn’t a typical example of the New Labour approach to fiscal policy.

Balls’ posturing on VAT is of course naked opportunism, designed to bolster his bid for the Labour leadership, and I can’t blame him for that. The party’s leadership contest has yet to burst into life and hasn’t come anywhere close to engaging the wider public. Perhaps Balls has found an issue which can resonate with many who are sceptical at best about Osborne’s “we’re all in this together” nonsense.

None of that changes the fact that VAT is a thoroughly regressive tax and that it will be a particularly appalling day for the coalition (and in particular the Lib Dems) if Osborne is allowed to push through a hike.

But had Labour pulled off the impossible and won the General Election they would certainly have increased VAT – no question about it. As Balls himself admits, all of their campaign rhetoric pointed in this direction. For him to claim now that there would have been any other outcome demonstrates that he is either plainly dishonest or deeply delusional.

The Tory passion for VAT

In the run up to this year’s General Election there is continuing speculation that both Labour and the Tories have secret plans to increase the rate of VAT to 20%. There are grounds to suspect that, in the event of a majority government for either party, the continuing fear of raising Income Tax may prompt such a move. Of course the Tories have always been keen enthusiasts for regressive taxation such as VAT, and they look the more likely to push for an increase. After all, they do have something of a history.

When Margaret Thatcher arrived in Downing Street in May 1979 the rate of VAT stood at 8%. Within a month Geoffrey Howe, in his first Budget as her Chancellor, had raised the bar by almost double to 15% and thus prompted a massive shift in the tax system from what we earn to what we spend. So began the Tory love affair with VAT.

Value Added Tax was introduced by Ted Heath’s Conservative government in 1973 as part of the conditions for Britain’s entry to the European Economic Community and the initial rate was set at 8% (with a 12.5% rate for certain luxury goods). During the 1979 Election the Tories repeatedly denied that they had any plans to double the rate of VAT, hiding behind the pedantry that a rise from 8% to 15% wasn’t quite double the rate they inherited. No matter, twelve years on Norman Lamont completed the job by raising the tax to 17.5%, the rate it stands at today. The 1991 hike was supposed to be a temporary measure to cover the cost of the switch from the failed Community Charge (Poll Tax to you and I) to the only slightly less unfair Council Tax. Unsurprisingly the Major government never reversed the rise.

The Tories love VAT because it is a tax on spending, it is easy to collect and enables rates of Income Tax on the highest earners to be reduced. Taxes such as VAT always have the biggest impact on the poorest in society because naturally a larger proportion of their income is spent on day-to-day items. The net effect is that the lower your income, the larger the percentage of it that goes to the Treasury.

David Cameron and George Osborne are being very cagey on the subject at the moment, but if the Tories manage to form a government after the election no one should be surprised if VAT stands at 20% before the end of the year. The generational Tory denial about this most regressive of taxes is highlighted by the continuing lack of concern that their largest individual donor, Michael Ashcroft, seems strangely reluctant to clarify whether or not he pays tax in the UK at all. It’s hardly breaking news to point out that the Tory approach to taxation is based on two very different sets of rules: one for the rich and one for everyone else.

See also:

VAT: The Tories’ Favourite Tax