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Leader: Osborne must rethink this economically reckless tax rise

The VAT rise will help guarantee an anaemic economic recovery.

In the days before they were partners in government, the Conservatives and the Liberal Democrats alike pledged not to raise VAT if they were elected. In one of the most prominent posters during the general election campaign, Nick Clegg's party warned of a "Tory VAT bombshell"; in response, David Cameron declared that he had "absolutely no plans" to increase the tax. On 4 January, when VAT is raised from 17.5 per cent to 20 per cent, both parties will break their promises.

The parties' ostensible opposition to an increase in VAT was founded on sound political and economic logic. As even Mr Cameron noted in April 2009, VAT is a regressive tax and "hits the poorest the hardest". While the richest 10 per cent pay £1 in every £25 in VAT, the poorest 10 per cent pay £1 in every £7. The Institute for Fiscal Studies has claimed that the tax is "progressive" because the poor spend more on VAT-exempt goods than the rich. But this analysis falsely assumes that the poor have the same powers of saving and borrowing as the rich.

George Osborne's insistence that the VAT rise was "unavoidable" does not bear scrutiny: £12.4bn of the £13.5bn to be raised could have been saved if the government had not cut taxes elsewhere, including National Insurance and corporation tax. A progressive government would also have introduced a far steeper bank levy, not the minimalist version adopted by Mr Osborne. Like so much of the coalition's austerity programme, the decision to raise VAT was a political choice, not an economic necessity. In many respects, Mr Osborne's decision to raise VAT is unsurprising. History teaches us that Conservative chancellors often turn to this tax when in need of revenue. It was a Tory chancellor, Geoffrey Howe, who raised VAT from 8 per cent to 15 per cent in the 1979 Budget, and another Tory chancellor, Norman Lamont, who pushed it up to 17.5 per cent.

Unlike his predecessors, however, Mr Osborne chose to make the bold assertion that "those with the most should pay the most". The vacuity of this promise has now been exposed for all to see. The VAT rise is not only unfair and unnecessary; it is also economically reckless. The Office for Budget Responsibility has forecast that the increase will reduce GDP by 0.3 per cent next year, producing an anaemic recovery at best.

The tax rise - which will cost the average household £425 a year - will rob the economy of vital spending power at a time of fiscal retrenchment. A report by the Centre for Retail Research found that the drop in consumer spending could cost 47,000 jobs. Mr Osborne's recent admission that the VAT rise will be permanent confirms the coalition's plan to tilt Britain's tax system in a regressive direction. Yet, despite his arrogant dismissal of calls for a "plan B", the Chancellor may find cause to think again.

This article first appeared in the 03 January 2011 issue of the New Statesman, The siege of Gaza