VAT rise: shifting money from the poorest to the richest

By Jon Trickett MP

The finance debate this week has highlighted the wholly regressive nature of the coalition government’s budget and interventions from various Labour MPs have exposed their plans as a failure to reduce the government deficit.

The House of Commons library itself has confirmed how regressive and therefore unfair an increase to VAT can be. As a percentage of household income, VAT accounts for 19% of the poorest 10% of the country’s income, in comparison to only 9% of the richest. Indeed, as I pointed out in the house this week, both parties that make up the coalition now have made this point in the past. The Prime Minister himself argued in May of last year that VAT is:

“very regressive, it hits the poorest the hardest …VAT is a more regressive tax than income tax or council tax”

(despite protestations that the Budget was ‘progressive’) and only last month, the deputy leader of the Liberal Democrats said:

“I hope we don’t have a VAT increase because it is the most regressive form of tax, it penalises the poor at the same rate as the rich.”

How Liberal Democrat members in particular, after campaigning so vigorously against a VAT rise can vote for this measure is beyond hypocrisy.

Not only this, but the government knows as well as I do that the rise will not bring down the deficit, which they maintain is its primary purpose. Partly because the money they expect to raise will be used to fund the reduction in other taxes but also because hitting the pockets of the poor is a sure-fire way to stunt economic growth.

Any increase in VAT will automatically produce an increase in inflation, which most economists agree will be come to about two per cent. This in turn will lead to pressure for interest rate rises, which will begin to squeeze out recovery and could result in a double dip recession. The British Retail Consortium has pointed out that there will be job losses, company bankruptcies and unemployment as a direct result of the inflation caused by the VAT rise. Moreover, the simple fact that aggregate demand of up to £13.5 billion will be taken out of the economy because of the rise has had some economists predicting that between 180,000 and 220,000 jobs will be lost.

If the measure was being used to take money out of the economy to help the deficit, one could understand the coalition’s train of thought, even if it is incorrect, but the same budget hands out money in tax cuts in the form of reductions in corporation tax and in small business profits tax, an increase in employers’ national insurance contribution threshold, increases in personal allowances for income tax, adjustments for basic rate and upper earnings limits and a council tax freeze. All those tax give-aways amount to £12.37 billion-almost the same amount as will be raised through the VAT rise.

The truth is that the measure is not in any way about reducing the deficit; it is about tax give-aways to the Tories’ friends. The VAT rise is exposed for what it is: a regressive tax, taking money from the whole economy to bolster the Tories’ friends in business and the 22 millionaires who sit around the Cabinet table. No doubt many people on the wealthier side of the divide in this country are rubbing their hands in glee.