One of the most memorable posters of the election campaign was the Lib Dems’ attack on the Tories’ “VAT bombshell”. It rightly identified George Osborne’s claim that he had “no plans” to raise VAT as a non-denial denial and launched a spirited attack on this most regressive of taxes.
But could the poster now return to haunt Vince Cable et al? A BBC survey of 28 influential economists found that 24 believe the new government will be forced to raise VAT from 17.5 per cent to 20 per cent before the end of next year. Meanwhile, the Institute for Fiscal Studies (IFS) has predicted that George Osborne’s emergency Budget will include a significant increase in the tax.
History teaches us that when in need of revenue, the Tories raise VAT first of all. It was Margaret Thatcher who almost doubled VAT from 8 to 15 per cent in 1979 in order to slash the top rate of income tax, and it was John Major who raised VAT by 2.5 per cent to its current level of 17.5 per cent.
Yet an increase in VAT would not only hit the poorest, who spend a disproportionate amount of their income on basic goods, hardest, but it would also suck vital demand out of the economy. A recent report for the Centre for Retail Research found that raising the VAT rate to 20 per cent would cost each household £425 a year on average. It added that the resultant drop in consumer spending could cost 47,000 jobs and lead to the closure of almost 10,000 stores.
The Tories’ willingness to raise VAT is partly based on the mistaken belief that its temporary reduction to 15 per cent failed to stimulate the economy. In fact, three economists from the IFS found that the cut had raised real consumption by 1.2 per cent.
David Cameron may have echoed Winston Churchill in declaring that eating your words is an “excellent diet”, but I doubt whether the Lib Dems will feel so comfortable about their own “VAT bombshell”.
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