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3 October 2011

Osborne’s council tax freeze is an old announcement

The Chancellor promised to freeze council tax for two years in his 2008 conference speech.

By George Eaton

You could be forgiven for thinking that George Osborne has pulled a rabbit out of a hat with his pledge to freeze council tax for a second year running. Indeed, most of the papers lead on the story this morning and treat it as a new announcement. “Tories find £805m for council tax bill freeze,” says the Times, adding that Osborne, who will address the Conservative conference today, has offered “comfort” amid the “austerity drive”.

But the truth is that this is merely a restatement of existing policy. Osborne first promised a two-year council tax freeze in his speech to the 2008 Conservative conference. “I can tell you today that the next Conservative Government will freeze your Council Tax for at least two years,” he said.

The policy went on to feature in the Tories’ 2010 election manifesto and the coalition agreement included a pledge to “freeze council tax in England for at least one year”, and to “seek to freeze it for a further year.”

With his growth strategy under attack from Tory backbenchers, it’s no surprise that Osborne is talking up this measure. But it is indicative of the weakness of his plan that, with growth stagnant (the economy has grown by just 0.2 per cent in the last nine months), the best he can offer is a re-announced £805m council tax freeze. Families paying an extra £450 a year in VAT (owing to Osborne’s decision to raise the tax to a record high of 20 per cent) will gain just £72 from the measure.

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Were Osborne truly determined to stimulate growth, he would have announced an emergency tax cut such as a temporary reduction in VAT (as advocated by Ed Balls). A VAT cut would boost consumer spending, lower inflation, protect retail jobs and increase real wages. When Alistair Darling reduced VAT to 15 per cent during the financial crisis, consumers spent £9bn more than they would otherwise have done. A VAT cut today would be a similarly effective fiscal stimulus. As Boris Johnson wisely observed in his Telegraph column in July, “[I]f we were to cut taxes now, it might be best to start with VAT to get people shopping again.” Osborne’s decision to raise VAT (a measure he described as “permanent”) by 2.5 per cent to an all-time high of 20 per cent automatically knocked 0.3 per cent off annual growth (OBR figures).

A council tax freeze will do little to stimulate growth and little to relieve families facing the biggest fall in living standards since the 1920s. We’ll get a better idea of Osborne’s plan when he addresses the Tories at 11:20am today (we’ll be live blogging his speech on The Staggers). But so far, all the signs are that he will offer little to combat the growth crisis facing Britain.