Coffee House

There is no reason to raise VAT

4 January 2011

It is very clear that the government cannot carry on borrowing at current rates and the
coalition’s proposals for reducing government borrowing are prudent. However, today’s VAT rise is unnecessary.

As has been said before, we did not get into this situation because the government taxes us too little. Ever since Gordon Brown abandoned his self-imposed restraint in 2000, government spending,
financed mainly by stealth taxes and increased borrowing, has expanded rapidly to its current level of over 50 percent of national income. As such the whole of the balance of fiscal adjustment
should come through spending cuts.

The coalition’s spending reductions have reflected political expediency, not sound economics. The aid budget will rise, despite the empirical evidence that shows the damage that foreign aid
does to recipient countries. The NHS has been ring-fenced, even though it has experienced huge budget increases and has a shocking productivity record. Pricey gimmicks given to pensioners such as
the Winter Fuel Allowance, free television licences and free bus travel remain in place, whilst the government has promised to increase state pensions in line with the higher of inflation, earnings
or 2.5 percent – the “triple lock”, as the government calls it. This last profligacy is wholly unnecessary at a time when much of the working population is experiencing real wage


A 2.5 percent trim of the NHS budget, not increasing the aid budget, the abolition of the pensioners’ gimmicks and not implementing the triple lock would enable the government to cancel the
VAT increase with considerable room to spare.

If the government insists on increasing taxes, then there are better candidates than a general increase in VAT. The government plans major re-regulation of energy markets that will raise prices and
discourage energy use. Meanwhile, VAT on domestic fuel remains at only 5 percent. This is simply incoherent government. Pensioners also enjoy special tax allowances that are granted and then
removed using complex formulae – pensioners even receive a married couples allowance, a luxury long removed from couples with children! Imposing the full rate of VAT on domestic fuel together
with the removal of the pensioners’ special tax allowances combined with the spending cuts proposed above would enable VAT to be reduced today to around 16%. If the retirement age were also
increased immediately to 66, the Chancellor would have the fiscal freedom to be a tax-cutting, reforming Chancellor.

We should make no mistake about it. The VAT rise today is a result of policy choices. The spending cuts are insufficient and those spending cuts are guided by political expediency. Ed Miliband is
right about the VAT rise, but for entirely the wrong reasons.

Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs.

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  • yank

    I like what Howard and the Oz did, but remember, they were in a similar situation to Canada, both net resource exporters to a nearby economic colossus, hungry to buy. The revenue side of their equations was a far simpler task for them to wrestle to the ground, as their balance of payments was easily turned to black. The UK and the US are different animals, far more complex, and of larger scale. Not saying we should ignore the Oz/Canuckistan experience and methods and ultimate goals, but how we get there will necessarily be a more challenging road. Because in both cases, it’s the spending side of the equation that must be attacked, not the revenue side.

  • Backflipper

    In Australia the former Howard Govt raised taxes early in his term. He kept them high until he’d paid off the National debt, which he eventually did and then he started lowering taxes. When the windfall from China kicked in he started puting real money back in “in the till” in the Future Fund. Alas, we have a Brown style uber-grosse spending Labor Govt here now, and predictably they have “in a flash” blown the fiscal restraint of a decade and we are back to the Labor disease of ever deeper spiralling debt. I sincerely hope for the UK’s sake that its new Govt learnt something from the Howard years. Yes raising taxes in the short to medium term to defeat the Dragon of Debt is worth it, if there is the muscle to frame Govt spending on a sustainable footing.

  • scepticblog

    Foreign aid is a scandal, whether one supports the idea in principle or not, because the UK is one of the very few countries not to impose conditions on how it is spent, particularly on capital projects. Other countries say, “Yes, we’ll build you a road/bridge/hospital/whatever, but you must use one of our companies to build it.” No such conditionality from the UK, which means our cash ends up in German/US/Japanese/whoever’s corporate pockets.

    Scandalous and stupid.

  • JohnAnt

    Philip -your word in God’s (and Osborne’s) ear.
    I doubt either is listening.

  • Fex Urbis

    @ Dorothy Wilson

    Will the young today be looking forward to a first class education, good jobs, affordable housing and generous final salary pension schemes? No I’m afraid they won’t. Brown is a useful bogeyman and though a cretin of epic proportions he didn’t start the rot.

    Percy has a point, we’ve done nothing to sort this out for decades but seem to think that the young should bear the brunt of the pain.

    “All in this together” (copyright G Osbourne 2010) is utter bollocks.

  • dorothy wilson

    Percy: what the “old buggers” – as with everyone else – are having to pay for his Brown’s financial incontinence.

  • TomTom

    “Same principle over TV license applys. “

    I pay for the Pensioner TV Licence from my

  • TomTom

    “devious method by Brown to make people grateful and beholden to him”

    You must be sucking lollipops still. Edward Heath introduced a

  • Percy

    Well Tarka they are the generation that let the polticians get away with it. Chickens are coming home to roost and the old buggers think someone else, ie the young, should pay for it. This is normally how revolutions start.

  • Paul B

    Winter fuel allowance should be abolished.However the money paid out should then be added to pension on a weekly basis . The scam of having a large sum of money- paid out in a lump sum just befor Christmas no less- was a typically (clever) and devious method by Brown to make people grateful and beholden to him. It has a clever emotive title, meaning that those with the gonads to attempt do away with it, will be accused of causing the death of pensioners in winter months. Same principle over TV license applys.

    I agree with the thrust of the article though, deeper spending cuts need to be made right across the board.The trouble with the article is the writer does appear to single out pensioners for attack

  • Lotus 51

    When the fiscal situation is stabilised today’s VAT rise will fund tomorrow’s income and NI tax cuts. If I had a long term plan to introduce an uber-simple universal flat rate tax system; in the current fiscal climate I’d start by increasing VAT to 20% and later cut income and corporation tax to 20% and so on…One can but dream.

  • Tarka the Rotter

    Greedy old buggers from the shires have worked a damn sight longer and have paid more taxes over their life times than the long-haired students rioting in the streets of London or the johnny-come-lately immigrants immediately claiming benefits – and possibly, just possibly, they are totally pissed off by the way politicans mishandle our national finances.

  • Percy

    Nice to see all the greedy old buggers from the shires out in force today.

  • dorothy wilson

    As there is no mains gas where I live I use oil for heating. The last time I had a delivery it was around 45p per litre. By the time I re-order in a month or so it is likely to be 80p per litre. That is bad enough with VAT at the lower rate. If VAT were to be charged at 20% my annual heating bill plus electricity for light and cooking would be around £2000.

    Thank you Mr Booth.

  • John Bracewell

    Looking at the extra spending on VAT because of this rise. Approx £2.50 extra VAT per £120 spent, so if extra VAT is £389 then spending on VATable items is approx £18,600. If a family is spending so much on VATable items their essential items bill (food, clothes, council tax, energy, water, telecomms etc)is likely to be £7000+ p.a. so net income, to be able to spend an extra £389 on VAT, is £25,600 and a gross income of approx £34K. The average gross income is nearer £25K p.a. so the VAT figure quoted is a good deal more than the average worker will spend in extra VAT. When you remember that VATable items are those you choose to spend on, or not, with the possible exception of increased fares to work, the imposition of nearer £250 p.a. extra VAT for an average paid worker i.e £5 per week or 2 less pints of beer a week puts this VAT rise in context.

  • Gawain

    If only we inhabited the same planet as Mr. Booth. What he suggests would be like taking a toddler to the supermarket, bribing them to behave well by giving them their favourite lolly and then ripping it out of their mouths just as you approach the till, scolding them because lollys are bad for them. The VAT increase is practical, in our current political culture, after thirteen years of being nannied and ninnied by Labour, Mr. Booth’s nostrums would see the government overwhelmed by screams of outrage.

  • JohnPage

    Yes, push more people into fuel poverty and then whack pensioners some more. Brilliant politics!

  • 2trueblue

    VAT is quick and easy to collect, that is why it was chosen. Good fiscal policy? Get a life. The mess that has to be cleared up is huge and time is of the essence. Where else can you put something in place that would start producing immediately? Time is the factor that this government does not have. 13yrs of Lisbores spending has left very few avenues that can be used that produce the money now. Liebore grew lots of potholes and debts and grew our taxes also so there is nowhere else to go that can produce money now. I would like to see the coalition promise to take the vat down once the recovery is more secure.

  • Victor Southern

    One can tell that Philip Booth is not near pensionable age himself as his main thrust is to hit pensioners. He wants to abolish their increases and the winter fuel allowance whilst increasing the cost of domestic fuel [already at punishing levels]. Those policies will, of course, result in pensioner cold weather deaths and so effectively trim down the number of pensioners – selective culling it is called.

    Without any supporting figures he blithely suggest trimming the NHS budget still further. We have yet to understand and see the effects of the Budget cuts.

  • normanc

    Yesterday I commented under a statist article that The Spectator needed to have the odd right wing post so credit where credit is due, this is more like it.

    Can I have some more please?

  • Chris lancashire

    What you propose as an alternative to the VAT increase is simply politically impossible at this point in time. Your scenario would have Labour claiming that savage cuts were being suffered by the poorest of pensioners and the NHS was being cut to the bone – neither true of course but that’s never stopped a politician, particularly a Labour one before.

    This VAT rise is quick, expedient, will raise around £10bn p.a. and will hardly be felt.

  • TomTom

    “The NHS is already trying to take 20 billion in efficiencies out of the service.”

    50% NHS Budget is Salaries; 70% Hospital Budget is Salaries

    Use more capital equipment to reduce porters and ancillary staff – electric powered gurneys…and re-engineer working practices….then pay secretaries and laboratory staff more to retain them

  • michael

    A small adjustment in lifestyle, or payout the extra … you’re free to choose.

    Alternatively pay stealth income / employment tax … grin and bear it.

  • TomTom

    German pensions are linked to NETT earnings and so should theoretically be cut as taxes reduce post-tax incomes for those working. Britain seems to have a policy of pork barrel buying off interest groups.

    Child Benefit could be restricted to 2 children but that would upset the most prodigious replicators in society. The number of Ministers could be reduced dramatically and the payroll vote cut.

    NHS abortions could be privatised so the NHS did not pay Marie Stopes for them and it could be rationed like IVF treatment.

    Prescription Charges could apply to all without an Exemption Certificate

    VAT could be cut on Renovation and imposed on New Build

  • Think This

    Of course all of these are welcome alternatives, but Mr Booth ignores the politics. Most of the measures would harm the elderly most – and these are the people most likely to vote and win you elections. Bribing the elderly is always top on any politicians to do list.

    Cutting taxes and spending would be nice, but its not likely to happen unless Mr Booth can add up the electoral maths as well!

  • Tarka the Rotter

    Sorry, don’t agree with targeting tax on the elderly and retired one little bit. You are right to say we didn’t get here because we were not taxed enough – God knows we were. We got here because of Labour pissing our money against the wall. So, let’s target government spending instead, particularly money handed over to China, India, the EU and various African dictatorships…Let’s be even more radical with quangos, having first decided not simply to shift their work onto another government body but to do away with them altogether. Let’s not order ships, guns, missiles, millenium domes and God knows what and then scrap them… let’s show some fiscal responsibility. For once.

  • Ken Bishop

    Isn’t it fun that taxes strangle the economy but, when the Tories want to raise VAT, that is suddenly a way to boost confidence and economic growth?

    The Chancellor calls this regressive tax “progressive”. When a person uses lies to justify themselves, it usually means they can’t think of any justification that in truth. And that is odd, since there would be plenty of sound reasons to put forward, if only he could think of them.

  • yank

    Kudos. It isn’t often that a leftist publication such as the Spectator will allow sensible fiscal conservatism onto its pages.

    Of course, as it hasn’t wanted to disturb its pet coalition government and its 5-year champagne socialist plan, the Spectator’s editors have kept all such disturbances and conservative thought out of the way, so that all discussions could be conducted untainted by that most despised of all… fiscal conservatism.

    But better far too late than never, I guess.

  • TrevorsDen

    Well its nice to know that the coalition cuts are not as draconian as the Labour Party are claiming.

    A ‘trim’ of the NHS would cost 25 billion. Easy come easy go unless you are sure you and your family will never be ill.
    The NHS is already trying to take 20 billion in efficiencies out of the service.

    Will cuts and savings ever match the desire for them? The VAT will give cover for income tax cuts later.

  • DavidDP

    “Imposing the full rate of VAT on domestic fuel”

    So you want to massively increase VAT on a necessity, in order to avoid a smaller increase mainly impacting consumer goods?

  • PayDirt

    One of the features of taxing is how easy it is to collect. Raising VAT will exacerbate the VAT-avoidance problem. Better solution would have been to selectively tax things like luxury goods, imported goods, even making certain currently proscribed drugs available and taxing them could be an option.

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