Nick Clegg reveals Tories’ £13bn VAT bombshell

by Stephen Tall on April 8, 2010

For the past week, the Tories have been decrying Labour’s plans to raise National Insurance, pledging to reverse the rise but with a startling lack of clarity about how they will pay for it – beyond vague talk of ‘efficiency savings’, the kind of fantasy finance David Cameron and George Osborne would be quick to scorn if other parties tried it on.

Today Nick Clegg is showing that NI cuts may be popular with business – but they have to be paid for by someone, and the most likely people to pay the price of the Tories’ cuts will be ordinary voters through increases in VAT. Here’s the press release (and accompanying billboard poster) which the party has just released:

    *****
    Nick Clegg reveals Tories’ £13bn VAT bombshell

    Liberal Democrat Leader Nick Clegg today revealed the £13.4bn VAT bombshell at the heart of the Tories’ tax plans.

    Analysis of the Conservatives’ proposed tax cuts or reversals shows that they will cost over £13.5bn a year in 2011-12 prices – yet just £100m has been specifically identified to fund them.

    This leaves a £13.4bn black hole, equivalent to a 3% rise in the standard rate of VAT. This would mean an extra tax of £389 on the average household.

    The Liberal Democrats have fully-costed plans to raise the starting threshold for income tax to £10,000 – this would put £700 back in the pockets of the vast majority of people, and lift around 4m of Britain’s lowest earners out of paying tax altogether.

    It would be funded by ensuring the very well-off pay their fair share, through measures including:

      * taxing capital gains as income
      * a mansion tax on properties worth over £2m
      * giving tax relief on pensions only at the basic rate
      * tackling tax avoidance

    Commenting, Nick Clegg said:

    Liberal Democrats have costed, in full, our proposals for tax cuts. We can tell you, penny for penny, pound for pound, who pays for them. We will not have to raise VAT to deliver our promises. The Conservatives will. Let me repeat that: Our plans do not require a rise in VAT. The Tory plans do.

    “Their tax promises on marriage and jobs may sound appealing. But they come with a secret VAT bombshell close behind.

    “So if you’re on an ordinary income, you have a choice. If you want your taxes to rise: vote Labour or Conservative. If you want your taxes to fall: choose the Liberal Democrats.”

    *****

And let’s remember that the Tory plans are a complete U-turn on their promise to put deficit reduction at the heart of their economic programme.

Think this is all Lib Dem spin? Well, let’s remind ourselves of what the Institute for Fiscal Studies said just last week:

The Conservatives claim that the spending cuts can, in effect, be rendered painless by efficiency savings that they say their advisers have identified. Whether or not that is true, using the bulk of these spending cuts to finance the NI cut means that they are not available to contribute to the task of reducing government borrowing that the Conservatives have set such store by. Reducing the deficit more quickly than the Government plans to will therefore require even greater cuts to public services spending, or to greater reliance on welfare cuts or tax increases that might be as economically costly as the NI increases they are seeking to mitigate.

The message is clear. Yes, whoever forms the next government could choose not to proceed with the increase in National Insurance. But let’s not pretend that any tax cut can be achieved by using fewer paperclips. Decreasing taxes like NI will either mean higher than budgeted for cuts in public spending, or an increase in taxes elsewhere.

The Tories might have been buoyed up by their tax-cutting tactics in the past week. The real question is whether Messrs Cameron and Osborne have, once again, put tactics ahead of strategey.