Speech Finance Bill Committee Stage – VAT increase

Diolch Mr Hancock, I am delighted to have the opportunity today to speak in support of the amendment put forward by my Honourable friend the Member of Parliament for Dundee East on behalf of the Plaid – SNP Group.

Our opposition to increase the VAT rate from 17.5% to 20% from January next year stems from two key reasons. One social and one economic.

On the social front, there is little doubt that VAT is a regressive tax. As the excellent House of Commons Library paper on this specific emergency budget proposal indicated the poorest in society spend 18% of their disposable income on VAT whilst the richest spend around 10%. For the poorest in society VAT is more likely to hit necessary spending where as the richer you get VAT costs tend to hit discretionary spending. This is a very important distinction.

The increase in VAT will also leave people on fixed incomes terribly exposed in terms of the effect on their incomes. The Budget also included real terms cuts in benefits payments with the change in calculating increases in benefits from the Retail Price Index to the Consumer Price Index. Those people dependent on welfare payments will therefore face an unwelcome double whammy on their incomes, affecting their purchasing power – a theme I will return to later in my contribution. Families in receipt of tax credits will also face a similar situation due to the cuts to tax credits.

Considering that there is always a lag between the human cost of a recession and the end of an economic downturn, placing further pressure on the very people who are the true victims of the banking crisis by hitting their disposable income seems callous. Indeed, the VAT increase could actually deepen the human cost of the recession as social problems such as personal debt increase.

For those of us on the left of the political spectrum the steep VAT increase in the Finance Bill and its disproportionate effect on the poorest in society contrasts with the treatment of the banking and economic elite who seem to have had a far easier ride in the Emergency Budget. Social justice would demand that those responsible for the economic recession with their irresponsible behaviour and the subsequent budget deficit which fixates the new UK Government, should pay more than their fair share. Whilst 13.5 billion pounds will be raised by the VAT increase, the bankers are subjected to a feeble banking levy of 2 billion per annum when it reaches its full force, with its effect wiped out by the changes to corporation tax.

I’d like to now move to the economic argument against the increases to VAT contained in the Finance Bill. VAT is essentially a tax on consumption. Considering that economic growth over the last decade was largely driven by consumer spending, resulting in a situation whereby personal debt levels in the UK have rocketed to the equivalent at 100% of GVA at 1.4 trillion pounds, there is a long term economic case to address this unsustainable situation by reducing dependence on retail in the in the economy and the promotion of production and manufaturing. Indeed debt charities such as Citizens Advice report that the amount of debt problems dealt with by the service continue to increase as the human cost of the recession feeds into the system. My preference however would be to change the banking code and make it more difficult for lenders to seduce consumers into debts they can’t service rather than directly reducing the purchasing powers of individuals via the use of VAT.

However, the major issue faced by the economy at this very moment is a lack of demand. Growth in consumer spending will be key if the UK Government is to reach the economic growth forecasts it has set in order to achieve its fiscal consolidation targets. The eminent economist David Blanchflower has argued that the budgets VAT proposals will stymie the consumer led growth it is depending upon. The increase will also hit small businesses, the backbone of the economy in constituencies such as mine.

To conclude, It’s important to note that the increase in VAT will also hit the public sector at a time when UK Government Department’s are being asked to make swinging cuts to their budgets. I’d be very interested to learn if the Treasury have made a calculation of the effect of the VAT increase on the budget’s of the devolved administration and if any consideration of the VAT increase has been made on the stringent financial situation now faced by the devolved Government’s. Furthermore, the Guardian estimated over the weekend that Charities could face additional costs of 150 million pounds per annum as a result of the VAT increase. Considering that these are the very bodies that will bear the brunt of dealing with the human cost of the economic downturn then slapping an extra bill on the activities of these vital life support organisations is indeed a very worrying indirect consequence of this particular proposal in the Finance Bill.

For these reasons I urge the House to support amendment number 13 when we vote later.

5 Responses to “Speech Finance Bill Committee Stage – VAT increase” [latest first]

  1. To put vat up to 20% is just a shallow easy move by ConDems, even after the spiel of Clegg during the six weeks of pre-Election. For a dutch bloke, he turns my guts, and we should recind his citizenship immediately.

    Keep the good work up Jon.

  2. If I may summarise your second point as “VAT is a tax on consumption, we need consumption to stimulate growth, therefore increasing consumption tax is wrong when we need growth”. You may have a point if you generalise it to increasing any tax is bad for growth. However, if you’ve decided that a tax increase of some kind is necessary then the oecd favour consumption tax. Their policy brief on the subject concludes “So, overall, these arguments provide strong support for the view that a move in the balance of taxation towards taxes on consumption would be likely to improve economic efficiency and increase growth.”

    If you accept the oecd’s views you can argue against this increase on social justice grounds if you wish, but on economic grounds VAT turns out to be the least worst.

  3. spallen, what would you think of the rate of VAT to be regionalised? Where the lower average wage pays lower VAT, and since sparser population leads to higher shop prices, as experienced by the far regions of highlands and isles of Scotland?

    London-centric small-minded legislation is wearing.

    Anyway, it is end of term next Tuesday, thank god. Gives time for the ConDems to do more swotting, god forbid…

  4. …and Jon, feel free to delete my 17 July comment above, no problems, and this one of course.

    All the best, have a good holiday. You deserve it after the total madhouse you have just entered. Totally another world it must be.

  5. Spallen, my point is that we need to discourage consumption in the medium term, but that the problem now is demand in the economy. If the UK Government is to achieve the optimistic growth forcasts it has set it will need to stimulate consumer demand. THe point i was trying to make in the speech was that the VAT rise contradicts their own economic strategy.

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