Why the VAT rise had to happen (South Dorset Liberal Democrats)

South Dorset Liberal Democrats <info@southdorsetlibdems.org.uk>

Why the VAT rise had to happen

June 23, 2010 7:02 PM
By Vince Cable: in Lib Dem Voice

By Vince Cable MP | Published 23rd June 2010 - 6:51 pm

With annual borrowing of £160bn and a massive blank where Labour's plans for deficit reduction should have been, this was always going to be a tough Budget - arguably the toughest since the 1980s. Some extraordinarily difficult decisions have been made to avoid an even worse crisis. Foremost amongst these was the decision to raise VAT from 17.5 to 20 percent.

Through the election campaign, all three prospective Chancellors were asked about VAT, and we all answered in exactly the same way: we have no plans to raise it, but we cannot rule it out. In fact, that was my position almost a year ago, when the true scale of the crisis became apparent.

That remained my position until shortly after the election. However, when the Office for Budget Responsibility reported that the structural deficit was £10bn higher, I realised that we had to act decisively, and that this meant adjusting our plans.

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.

All of these are achievements that strongly reflect the values of Liberal Democrats. There was no way that a responsible government could evade the tough choices that Labour's mismanagement had forced upon us. But, as Nick explained and I fully endorse, by playing our part we have ensured that the decisions made were guided by fairness - and that includes raising VAT.