The VAT rise: a refresher course for Labour

by Stephen Tall on January 4, 2011

Today’s increase in VAT from 17.5% to 20% — announced in the Coalition’s emergency budget last year — has triggered a fresh burst of opportunism criticism from Labour. The “wrong tax at the wrong time” claims their leader Ed Miliband.

How Labour’s last Chancellor backed a VAT rise

I suspect there’s a Labour MP we won’t be hearing from today, though: Alistair Darling*, Chancellor until the party’s defeat in May. As Mark Pack noted here last July, Mr Darling was a strong advocate of increasing the rate of VAT in order to tackle the UK’s massive deficit, with The Guardian noting that Lord Mandelson’s memoirs showed

… that Brown and Darling rowed over economic strategy. He “vetoed point-blank” a proposal from Darling to raise VAT up to 18% or 19%. The then chancellor then blocked a proposal from Brown to rule out VAT rises under Labour in the course of that parliament.

Have the Lib Dems U-turned on VAT?

Labour claim the Lib Dems have U-turned on VAT, ruling out increases before the election before bringing them in under the Coalition. It’s a false and misleading argument.

The Lib Dems did not rule out increasing VAT if we were in government. Vince Cable could not have been more explicit on this — here’s a BBC News report from 8th April: “Vince Cable has repeatedly said his party would not rule out VAT rises”.

What the party did say — accurately — was that Lib Dem spending plans did not need any increase in VAT, a point back up in April by the IFS. As keen observers will have noticed, though, the Lib Dems did not win a majority at the last election, and some of our proposed public spending cuts and tax increases haven’t made it into the Coalition Agreement.

The money has to come from somewhere, though. Labour, it seems, would prefer increases in National Insurance over increases in VAT — an argument Vince Cable challenged head-on here on Lib Dem Voice last summer:

No decision to raise tax is taken lightly, but VAT is more contentious than most. One reason is that VAT is often denounced as if it were the most regressive tax of all. However, the truth is more nuanced. As a proportion of expenditure, it is in fact mildly progressive, as the IFS have recently explained. This stems from its exemptions for certain essentials, such as food and children’s clothing, which take a bigger chunk of the spending of poorer households.

VAT is far less damaging for growth than most other taxes, like those on income or employment. It is preferable to even steeper spending cuts that would hurt the vulnerable or damage our ability to grow the economy. Restoring sustainable growth is the essential remit of the Ministry I head, the Department of Business, Innovation and Skills.

There are other far more regressive taxes, and our raising VAT has enabled us to do something about them. For example, under Labour, the poorest decile suffered a 90% rise in council tax, compared to 75% for the richest, which is why we have sought to freeze council tax in England for next year. It also let us increase significantly the Child Tax Credit, fund a £1,000 increase in the income tax allowance and triple-lock annual increases in the state pension – while all the time setting a course that returns the public finances to surplus.

What Lib Dem blogs are saying:

“Wrong tax, wrong time”, says Milliband. And the right tax, right time would be? (Mark Valladares)

At every stage, Labour have decried the cuts as too fast, too soon, without ever suggesting what they might cut and when. And it really is becoming tiresome. During the election campaign, Labour talked about £44 billion of cuts. They weren’t alone, although none of the three major parties were entirely clear about how they would do it. But now that they don’t have a general election to salvage, all is quiet on the prudence front.

Why spoil a good VAT story for the sake of the facts. (Michael Gradwell)

Well the rise in VAT to 20% is upon us and according to Ed Milliband it will cost families £389 per year. He didn’t work this figure out as he just took it from a Liberal Democrat poster from the general election. As this figure is at least eight months old and was based on what the Tories would have to do in order to pay for their other tax promises and as we have had so much turmoil in the government finances, it would seem to me that this figure is out of date. It has not only been arrived at in the most lazy way but is also inaccurate, but why spoil a good story for the sake of the facts.

Old and Sad – having wrecked our economy Labour now tries to block recovery (Nick Hollinghurst)

Old & Sad may be a jokey abbreviation for Oldham & Saddleworth – but it also suits the discredited Labour Party. The Coalition has been forced to put right Labour’s disasterous financial mismanagement using a variety of painful, but unavoidable, measures. … With their careless attitude to figures and finance it’s not surprising Labour got us into the mess we’re in!

* UPDATE: I underestimated Labour’s chutzpah. As Andrew Sparrow reports in the Guardian, Mr Darling has made a virtue out of being over-ruled by his ex-boss.

Note, though, that he doesn’t retract his widely-known view that raising VAT was the best way to help reduce the deficit. Note, too, that Mr Darling is guilty of being economic with the actualite: all three parties refused before the election to rule out a VAT rise after the election.

If Labour were in government now, rather than in opposition, does anyone serously doubt that whoever would now be their Chancellor would also be defending a VAT rise?