Why a VAT cut would pay for itself

The Guardian is wrong to oppose Balls's call for a temporary VAT cut.

Ed Balls's bold call for a temporary VAT cut might have been welcomed by Guido Fawkes but some of the shadow chancellor's traditional allies haven't been so supportive. A Guardian editorial declares that a cut in VAT "makes sense only if one wants to shovel £2.5bn a month out of the Treasury as fast as possible". But it's clear that the Grauniad has got its sums wrong. Osborne's VAT increase will raise around £13bn a year, so at worst a reduction to 17.5 per cent would cost the Treasury £1.08bn a month, not £2.5bn.

This error aside, there's much evidence that a cut in VAT would largely pay for itself. The Office for Budget Responsibility has forecast that the increase will reduce GDP by around 0.3 per cent a year. We know from the OBR's most recent Economic and Fiscal Outlook that a reduction of 0.3 per cent in growth adds around £13.9bn to the deficit (over two years).

Ok, so what about the remaining £7bn? Well, as Balls said in his speech yesterday, a VAT cut would act as an effective fiscal stimulus. The Tories' decision to raise the tax was partly based on the mistaken belief that its temporary reduction to 15 per cent failed to stimulate the economy. But an analysis by the Centre for Economics and Business Research found that consumers spent as much as £9bn more than they otherwise would have done during the period for which the cut ran.

A VAT cut would boost consumer confidence, lower inflation (thus reducing the risk of a premature rate rise), protect retail jobs and increase real wages, meaning that it would likely pay for itself in the long-term. With growth flat for the last six months, the economic case for a VAT cut is overwhelming.

George Eaton is political editor of the New Statesman.

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Theresa May is paying the price for mismanaging Boris Johnson

The Foreign Secretary's bruised ego may end up destroying Theresa May. 

And to think that Theresa May scheduled her big speech for this Friday to make sure that Conservative party conference wouldn’t be dominated by the matter of Brexit. Now, thanks to Boris Johnson, it won’t just be her conference, but Labour’s, which is overshadowed by Brexit in general and Tory in-fighting in particular. (One imagines that the Labour leadership will find a way to cope somehow.)

May is paying the price for mismanaging Johnson during her period of political hegemony after she became leader. After he was betrayed by Michael Gove and lacking any particular faction in the parliamentary party, she brought him back from the brink of political death by making him Foreign Secretary, but also used her strength and his weakness to shrink his empire.

The Foreign Office had its responsibility for negotiating Brexit hived off to the newly-created Department for Exiting the European Union (Dexeu) and for navigating post-Brexit trade deals to the Department of International Trade. Johnson was given control of one of the great offices of state, but with no responsibility at all for the greatest foreign policy challenge since the Second World War.

Adding to his discomfort, the new Foreign Secretary was regularly the subject of jokes from the Prime Minister and cabinet colleagues. May likened him to a dog that had to be put down. Philip Hammond quipped about him during his joke-fuelled 2017 Budget. All of which gave Johnson’s allies the impression that Johnson-hunting was a licensed sport as far as Downing Street was concerned. He was then shut out of the election campaign and has continued to be a marginalised figure even as the disappointing election result forced May to involve the wider cabinet in policymaking.

His sense of exclusion from the discussions around May’s Florence speech only added to his sense of isolation. May forgot that if you aren’t going to kill, don’t wound: now, thanks to her lost majority, she can’t afford to put any of the Brexiteers out in the cold, and Johnson is once again where he wants to be: centre-stage. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.