VAT, Tories and dangerous complacency

The Cut VAT Campaign calls for a permanent cut on VAT to 5% on all home repair, maintenance and improvement work. The campaign has the support of over 50 business organisations, including the Federation of Small Business and the Federation of Master Builders. Labour’s 5 point plan argues for a temporary cut in VAT.

On similar lines, I held a debate in Westminster Hall calling for VAT on empty homes to be cut to 5%. At present, new build properties attract a zero rate of VAT, while 20% is charged on home improvements. VAT drops to 5% after 2 years on the renovation of empty properties but there is little awareness of this rule, which may explain the high levels of empty properties in many parts of the country. In Sefton there are 6,000 empty properties, nationwide there are up to 750,000..

A VAT cut to 5% on the renovation and re-use of all existing domestic buildings would allow greater emphasis to be placed on urban regeneration. In the search for ways of kick starting the economy, VAT is one of the most effective tools available. The temporary VAT cut from 17.5% to 15% under the Labour government gave a much needed stimulus as the money went straight into the economy – much of it through increased consumer activity.

As many as 249,000 workforce jobs have been lost in the construction sector alone since 2007 according to the Office for National Statistics. Research by Experian shows that a cut in VAT on home repair and improvement work based on a standard VAT rate of 17.5% suggests 24,200 extra jobs construction could be created in the first year alone if VAT on home improvements was cut to 5%. This growth in the construction industry would also lead to 31,000 new jobs created in the wider economy.

Unless the construction industry can recruit and train sufficient people now there will be a serious skills shortage in future years. The number of construction apprenticeship starts fell by 4,010 between 2008/09 and 2009/10. Almost 1 million people under 25 are currently unemployed, but when the construction industry returns to more sustainable levels of growth there will not be a sufficient number of people already equipped with the right skills to meet demand. It will be difficult for employers to make more apprenticeship places available unless there is an increase in construction activity now.

A cut in VAT on home improvements would have an immediate stimulus effect and a longer term sustainable impact on industry and on the economy.

David Cameron was asked by his local Federation of Master Builders to support the Cut VAT Campaign. Cameron agreed to write to the Treasury about the idea. That was some months ago. I asked the new Treasury Minister Chloe Smith to chase this up. She agreed to find out what the response to his letter had been but her other comments worried me. The minister said the government approach to cutting the deficit was endorsed:

“by the International Monetary Fund, the OECD, the European Commission, the rating agencies and UK business organisations beyond those that deal in installing bathrooms.”

The comments betrayed the government view of small and medium sized businesses as unimportant, when they are in fact major drivers of job creation and economic growth. Construction has a big part to play in securing economic recovery.  A cut in VAT on home improvements is a great way of supporting that recovery. The calls by leading economists show the urgent need for the government to change its approach.

The response of the government to the Cut VAT Campaign are part of a dangerous complacency that is in grave danger of leading to disaster for our economy and for the people of this country.

Bill Esterson is the Labour MP for Sefton Central.