RUTH SUNDERLAND: Cut in VAT would have popular appeal and send a strong message of support to troubled parts of the economy – just the ticket
- Rishi Sunak is understood to have cooled on the idea of reducing VAT
- Two former Chancellors, Sajid Javid and Alistair Darling, have come out for a cut
Advice can be hard to give and even harder to receive, particularly if it comes from someone who used to do your job.
But Rishi Sunak should pay heed to two of his predecessors – from opposite sides of the political divide – when they urge him to cut VAT. Mr Sunak is understood to have cooled on the idea of reducing the levy, and to want to wait and see how consumers respond to the gradual lifting of lockdown.
Problem is, there may not be time to do that: the downfall of shopping centre owner Intu is evidence enough of how rapidly retailers are running out of road and the situation is at least as dire in hospitality.
Magic touch?: Chancellor Rishi Sunak needs a proper rabbit to pull out of the hat in his quasi-Budget
Two former Chancellors, Sajid Javid and Alistair Darling, have come out for a cut. There is bound to be resistance within the Treasury. Tax revenues have been hard hit in the pandemic and VAT is a very nice little earner, channelling more than £130billion into the national coffers the last tax year.
The sums raised, at least pre-Covid, have risen strongly from £59millon 20 years ago. We might not like paying VAT, but the Government, so the argument goes, has got to raise money from somewhere.
Mr Sunak may doubt a cut is necessary to encourage spending, when the lucky ones among us who still have paypackets have been turned into enforced savers and therefore have plenty of money to splurge.
Perfectly true, but given the uncertainty about the economy, many will opt to pay down debts or ramp up savings instead.
In that context, a VAT cut would be a bold move and send a powerful signal from the Government that it wants people to shop for Britain. Another objection is that a blanket reduction would benefit online retailers, but it could be targeted at specific sectors.
Setting aside the desperate need to get customers back into the shops, pubs and restaurants post-Covid, VAT at 20 per cent is too high anyway. It is a ‘regressive’ tax, in that it hits the less well-off hardest.
The ability to control our own VAT rate is one of the potential benefits of Brexit. Readers of a certain vintage will recall that it was brought in to replace the old purchase tax when Britain joined the EU in 1973.
Under a 2006 directive, member states have to set a standard VAT rate of at least 15 per cent, but out of the EU those strictures no longer apply. Other countries are already cutting, including Norway and Germany.
When Alistair Darling cut VAT to 15 per cent in 2008, to stimulate the economy after the financial crisis, it was judged to have been a success. The cost then was around £12.5billion, and it would be more now. An overall reduction to 17 per cent now would cost £21billion, which is a lot of money – but as a one-off temporary hit it would give the Chancellor a lot of bang for his buck.
Mr Sunak has launched a barrage of initiatives, so many, in fact, that many people have already forgotten about a lot of them.
We all know about furlough and bounce-back loans but other measures, including relief on business rates and cash grants of up to £25,000 for some firms, are being overlooked along with great ideas such as £150m from dormant savings accounts to help charities, or the £500m fund for high-growth enterprises.
The Chancellor can always follow the example of another predecessor, Gordon Brown, who thought if something was worth announcing once, it was worth announcing multiple times. But he could still do with a proper rabbit to pull out of his hat in his quasi-Budget next month.
A cut in VAT would have popular appeal and send a strong message of support to troubled parts of the economy. In short, just the ticket.