Why VAT really does hit the poorest hardest

The data that proves Osborne was wrong to describe VAT as a "progressive" tax.

If you look at the population and how much they spend, then VAT is progressive

George Osborne, Today programme, 4 January 2011

When George Osborne rose VAT to 20 per cent in his emergency Budget, I, like others, warned not only that the tax rise would prove economically defective - it is expected to reduce annual growth by 0.3 per cent - but also that it would hit the poorest hardest. As a regressive tax that takes no account of income, VAT inevitably squeezes low earners.

But despite all evidence to the contrary, Osborne insisted that VAT was a "progressive" tax. On 4 January 2011, the day that VAT rose to a record high of 20 per cent, he told the Today programme:

If you look at the population and how much they spend, then VAT is progressive...Income tax and National Insurance would have a more damaging impact on poorer people in our society

The data, however, tells a different story. The number crunchers at the Office for National Statistics have published a new report showing that the poorest fifth of UK households pay significantly more in VAT as a percentage of their disposable income than the richest fifth. As the graph below shows, the poorest fifth spend nearly 10 per cent of their disposable income in VAT compared with 5 per cent for the richest households.

Average household VAT as a proportion of household disposable income


The effect of the 2.5 per cent rise in VAT was not included in the analysis but the data (from 2009-10) is recent enough to disprove Osborne's assertion that the tax is "progressive".

The Institute for Fiscal Studies has suggested that VAT is "progressive" since the poorest spend a higher proportion of their disposable income on VAT-exempt goods such as food, children's clothes and domestic fuel and power. But this analysis fails to take account of changing spending patterns. As the ONS report notes, the poorest fifth now spend 250 per cent more on "new cars, holidays abroad, meals out, audio/visual goods (including TVs) and photographic equipment" than they did in 1986. As a result, VAT has become more, not less, regressive in the last 25 years.

It's possible that VAT will become less regressive as the poorest, facing the biggest squeeze on living standards since the 1920s, reduce spending on non-essentials such as holidays and electronic goods. Indeed, since the height of the consumer boom in 2001-02 (when the poorest fifth were spending 13 per cent of their income in VAT), VAT has become slightly more progressive. But for now, it continues to hit the poorest hardest.

As one Conservative politician commented in April 2009 when asked what taxes he would raise:

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.

His name? David Cameron.

George Eaton is political editor of the New Statesman.

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Michael Gove definitely didn't betray anyone, says Michael Gove

What's a disagreement among friends?

Michael Gove is certainly not a traitor and he thinks Theresa May is absolutely the best leader of the Conservative party.

That's according to the cast out Brexiteer, who told the BBC's World At One life on the back benches has given him the opportunity to reflect on his mistakes. 

He described Boris Johnson, his one-time Leave ally before he decided to run against him for leader, as "phenomenally talented". 

Asked whether he had betrayed Johnson with his surprise leadership bid, Gove protested: "I wouldn't say I stabbed him in the back."

Instead, "while I intially thought Boris was the right person to be Prime Minister", he later came to the conclusion "he wasn't the right person to be Prime Minister at that point".

As for campaigning against the then-PM David Cameron, he declared: "I absolutely reject the idea of betrayal." Instead, it was a "disagreement" among friends: "Disagreement among friends is always painful."

Gove, who up to July had been a government minister since 2010, also found time to praise the person in charge of hiring government ministers, Theresa May. 

He said: "With the benefit of hindsight and the opportunity to spend some time on the backbenches reflecting on some of the mistakes I've made and some of the judgements I've made, I actually think that Theresa is the right leader at the right time. 

"I think that someone who took the position she did during the referendum is very well placed both to unite the party and lead these negotiations effectively."

Gove, who told The Times he was shocked when Cameron resigned after the Brexit vote, had backed Johnson for leader.

However, at the last minute he announced his candidacy, and caused an infuriated Johnson to pull his own campaign. Gove received just 14 per cent of the vote in the final contest, compared to 60.5 per cent for May. 


Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.