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Tuesday, 4 January 2011

The VAT increase is here...

Yes, unfortunately it is.

From today, VAT has increased from 17.5% to 20%. Chancellor George Osborne has defended the move, arguing that it would boost employment and that it was preferable to increasing income tax. He went as far as to say that "if you look at the population and how much they spend, then VAT is progressive."

Well, he's wrong on both counts. Increasing VAT would have at best a marginal impact on boosting employment and may in fact have the reverse effect; increasing income tax to those on the higher threshold may well be preferable to many than a VAT hike. It's simply not true to say that VAT is progressive, especially when the basic fact that lower income families spend a greater proportion of their income is taken into account. He's also hypocritical: the Tories promised prior to the election that they would not increase VAT for quite sensible reasons (not least that it was inherently unfair) and it is plainly inconsistent of Osborne to defend his actions ideologically.

The VAT increase was of course part of Osborne's emergency budget that was paraded as "fair" and "progressive" when it was evidently anything but. Unfortunately, Osborne's defense of his policy simply plays into Labour's hands: Ed Miliband has already pointed out that "David Cameron admitted before the election that VAT rises are unfair...he should come out and apologise for misleading the British people." Alan Johnson has also attacked the chancellor, saying "this is a broken promise - this was the big issue of the general election campaign."

Actually, Alan, I'm not so sure that VAT was the big issue of the election campaign, but the point being made is hard to argue with. The Conservatives made a promise they haven't kept. The Liberal Democrats, also opposed to increasing VAT in principle, supported Osborne's budget - even if they managed to tweak it positively in some respects.

The Labour Party is keen to claim that there is an ideological basis for the cuts. This is why Osborne should be careful in how he defends them. If he attempts, as he has done, to justify them on principle as a means of achieving a fairer society he is not only being disingenuous but playing into Labour's hands. However, if he argues that the cuts are a painful necessity in tackling the budget deficit, this will be a welcome step in taking the argument to Labour. How can Labour take the moral high ground when it firstly created the mess and now paints all means of cleaning it up as unethical while refusing to unveil what its own cuts would have been?

Also, the public understand when actions are being taken in the public interest. Like most Liberal Democrats, I did not come into politics to support an unfair increase in VAT. I don't support it. I don't like it. But I support the rationale behind it: to overcome the effects of Labour's excessive spending and the inefficient way it managed the economy.

I have read many people's thoughts on this issue. The blogosphere is full of talk of doom, gloom and catastrophe. I will agree with those who skilfully demonstrate that the VAT increase will disproportionately affect those at the bottom, but I can not accept the facile arguments of those who predict this will severely cripple the economy or create widespread poverty. Just as Alistair Darling's temporary VAT cut (of 2.5% to 15%) had a very limited impact in stimulating the economy, I would expect an increase of 2.5% to have a similarly negligible effect - at least when compared with Darling's proposed National Insurance hike which would, by Labour's admission, have cost 75,000 jobs for a mere £3 billion benefit.

Osborne deserves some credit for his attempts to come to terms with the budget deficit which is, after all, Labour's legacy. However, he deserves less credit for the means by which he is doing so. He has been less than honest and less than fair. There were alternatives to the VAT increase at his disposal, but he refused to use them.

Labour, however, should not be allowed the opportunity to gloat at the coalition's expense. Its entire economic policy was built on dishonest premises and a commitment to excessive borrowing. Brown, Darling, Miliband et al have demonstrated that they can not be trusted to run the economy and clearly have nothing valuable to contribute to Britain's recovery. Perhaps Labour should be reminded that if people are suffering in the current economic climate it is they who are primarily responsible.

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