VAT increase looks a done deal, despite all the Government’s denials

Sir Stuart is part of a growing army of business leaders to come out in protest at the Government’s planned rise in National Insurance contributions, but he accepts that the money has to come from somewhere to repair the public finances and it cannot all come from cutting government waste.

According to calculations by the Institute for Fiscal Studies, a rise would be capable of raising very substantial sums of money. Raising VAT to the European average of around 21 per cent and getting rid of exemptions and the zero rating would yield an amazing £40bn a year, or nearly 3 per cent of national income. This would be enough to eliminate the Budget deficit within three to four years. This of course couldn’t all be done in one go, or it would collapse consumer demand. But if phased in over several years, it might even boost demand, as people would bring purchases forward to beat a scheduled rise in tax.

The argument most frequently used against raising sales taxes is that it is retrogressive, or because it is a flat rate tax applied to all, it hits lower income earners disproportionately hard. Actually, I’m not sure this is entirely true, as higher earners also spend a lot more, on food and drink as well aseverything else. To the extent that it is true, the problem could easily be corrected for through the tax credit system.

Brown promises a fight back against the business leaders at a press conference today, as well as a new dosier which pupports to demonstrate that Tory promises of tax cuts and a reversal in the planned NI increase are completely unfunded, and would therefore require deep cuts in front line services. All hot air, I’m afraid.

The spectacle of the Government accusing the Tories of being irresponsible with the public finances is quite the funniest thing I’ve seen in a long time. Apparently, it is now Brown who is the man for responsible deficit reduction, while the Tories haven’t a clue. Brown is trying to steal the Tories clothing.

Despite promises not to, I’d put money on VAT going up even if Labour is re-elected. The nation’s finances are in much more serious shape than the Government will admit, and a great deal more needs to be done, both on tax rises and spending cuts, than is currently planned.

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