Was the decision to increase VAT a bold move?

Subsequent to the UK economy falling into recession after a 10-year boom, it became apparent that either a new tax would have been introduced; or, a direct tax (such as income tax) would have had to be raised in order to help the government out of its recession and protect frontline services.

In his pre-budget report, Alistair Darling confirmed that National Insurance (NI) would rise by 0.5% in April 2011 to help protect frontline services, and VAT would be restored to 17.5% to help the government out of its deficit and restore £12bn in revenues. This comes after a 13 month break from the lowered level of 15%.

There have been many debates against the increase in VAT. It has been argued that an increase will slow down business spending, thus causing a slower recession recovery. With businesses being more cautious about cash flow, it will end up defeating the purpose of a VAT increase.

Committees such as the Cut the VAT Coalition believe that VAT should have been cut further on maintenance and home improvement work. This would help “the government achieve its target of cutting carbon emissions by 80 percent” and “help millions of UK homeowners by getting rid of cowboy builders, helping those who cannot afford vital repairs to their homes, bringing our empty properties back into use and protecting the countryside”.

On the other hand, the treasury wants to see a higher increase in VAT to save the individual tax payer an increase in NI contributions. The treasury argues that the increase in NI by 0.5% in April 2011 will be regarded as a tax on jobs, causing more job cuts and less job creation in the future. Additionally, they claim that if VAT was increased further then consumer spending would be protected in the difficult times the UK economy is experiencing.

Guardian.co.uk quoted: “A 1% rise in National Insurance raises a total of £4.48bn in a full year. A 1% rise in VAT by contrast raises slightly more at £4.8bn.” Clearly, a higher rise in VAT is more favourable to tax payers rather than an increase in income tax.
 
I am leaning towards the treasury’s view of not increasing income tax, and instead implementing a flat tax (such as VAT). This is so that individual tax payers like myself are not affected by the deficit caused by careless government planning and spending after a 10-year boom in the economy. I am also glad that I am not in the shoes of Alistair Darling as it seems neither raising nor decreasing VAT percentage rates would be the right thing to do!
 

Nurtac Irfan studied Accounting and Finance at Hertfordshire University and is now Finance and Operations Director for a digital media company based in London.

Comments

[Air Jordan]

Nice blog.Now,from your blog,I know something others. thanks.

[David Emery]

Hi,

Not bold - 20% would be bold. THis site says there will be 20% VAT by 2011 www.tmf-vat.com but I have also heard that analysist from investment banks are now running a 5% increase in their models to 22%+ given the likely 175bn+ deficit.

What's interesting is what other countries are doing - all increasing VAT to shift their econmoies away from consumption into savings and investment. E.g Germany 3% increase.

David