Will Brown let Darling tell us that he is going to hike the VAT rate to pay for the stimulus package?
James Forsyth 6:44pm
As we learnt during the banking crisis, what Robert Peston predicts tends to become reality shortly afterwards. So, his informed speculation on what is in the PBR is well worth reading.
This passage is particularly interesting and appears to be the latest shot in the briefing wars, which has reached up to cabinet level, around the Brown-Darling fight over whether or not Labour should explain how it tax cuts and increased spending will be paid for:
I suspect that how the PBR is reported will turn on whether the specific measures needed to pay for the fiscal stimulus are announced or not. If Darling just makes a vague allusion to spending restraint and tax increases if necessary, then the cost of paying for this will remain abstract. While if Darling mention specific numbers, the reality of the situation will hit home.“But he [Darling] will also announce deferred tax rises and deferred cuts in public spending - to kick in when the economy has recovered a bit.
When would that be? Maybe 2010, maybe 2011.If he fails to announce such debt-reduction measures, there could be very strong downward pressure on sterling and a corresponding damaging rise in the cost for the government of borrowing.
And, to be clear, the incremental sums he'll announce he has to borrow over the next couple of years will be colossal - equivalent to at least 8% of GDP, possibly more, or well over £110bn per annum.
You have to go back to at least the 1970's for a time when public borrowing was spiralling up at such an alarming rate.
Such a rise in public borrowing would be unsustainable.
Which is why, to repeat, there will have to be deferred tax rises and deferred public spending reductions inked into the public accounts and announced by the chancellor.
All of that is inevitable.So which taxes will rise?
Well my prediction is VAT.
For the sake of transparency I should say that I don't know that there will be a VAT rise.
But a deferred increase from 17.5% to 22.5% in the VAT rate would raise around £20bn.And it's one of the few future tax rises which might actually stimulate a bit of increased economic activity ahead of its implementation, rather than encouraging us to save
To use the economic cliche of the moment, it would give us all quite a "nudge" to spend now, before the swingeing increase in VAT would kick in.”
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Comments
Oor Willie
November 21st, 2008 7:22pmMight be wrong but can't see Brown/Darling admit to any spending cut in the future since that's the main weapon they are using against Cameron/Osborne.
A VAT increase coming up? Must buy that Japanese TV and that German car NOW to stimulate our economy.....
CCTV
November 21st, 2008 9:05pmBut a deferred increase from 17.5% to 22.5% in the VAT rate would raise around £20bn.
Yes and imposing VAT on transport fares, water, prescriptions, food, children's clothing, books, newspapers - would just bring us in line with Germany.
Labour should go out with a bang rather than a whimper - why not impose VAT on houses just for good measure ?
TrevorsDen
November 21st, 2008 10:13pmAs I believe I said the other day - "Live Now Pay Later".
The time is ripe for this film to be given a re-run.
The solution to one debt fuelled spending binge is to embark on another?
The. Madhouse. Politics. Of. - rearrange these words into a well known phrase or saying.
Andy Leeds
November 22nd, 2008 3:55amOr Capital Gains on houses ?
They will be taxing the air we breath next.
Roger Davies
November 22nd, 2008 8:31amAny amount of increased borrowing will be labeled "The Brown Burden".
mac
November 22nd, 2008 11:05am@ Roger Davies:
Except by the BBC - there, we'll learn that it is all Osborn'e fault, of course.
And except from the mouths of Government ministers, whose every interview will begin, as instructed by Mandelson: "Look, let me make this very clear, under Gordon's inspiring leadership we've done what we had to do for Britiainshardworkingfamilies, but let me just make it absolutely clear that fault lies with the last irresponsible Tory government . . ." [you know how this claptrap continues].
a.
Nicholas
November 22nd, 2008 4:31pmYep, mac, the New Labour mutants have taken the fairy tale to new heights of invention and implausibility. Appropriate that they should be leading the GBP up the garden path. The fairies live at the bottom of that garden and the GBP have about as much hope of finding them as Brown Plan 318b has of working.
I don't know how these New Labour supporters can write some of the stuff they do without embarrassment and a deep sense of shame.
DB
November 22nd, 2008 6:13pmI'm not so convinced that all taxes are on the right-side of the Laffer curve, but VAT has shown signs - in the early 1990s, when Lamont increased the standard rate to 17.5%, the revenue growth was sluggish.
Also, raising VAT is quite regressive as a tax-raising measure - poor people consume more. The way the British VAT system protects against this has been through the 'necessities' exemptions; if Darling touches them AND raises the rates, he'll be going against the Party... And I can't see Gordon doing that.
That said, the focus of Peston's analysis seems right - a short-term stimulus will be a lot more credible if tied to commitment to longer term fiscal consolidation.
But the politics are monstrous. If you take this together with all the hints about the stimulus content (increases to Tax Credits), what they suggest is that the middle-income vote will be getting very limited stimulus benefits and faced with a big increase in tax further down the road. This isn't election-winning stuff.
It also guarantees middle- and higher-income earners will act to counter future higher taxes - so although some purchases might be brought forward, long-term consumption will come down for the higher-income categories.
Hereford
November 24th, 2008 9:04amOoops! failure to realise that Peston is briefed by the Government in order to ensure that the messages he sends out support Labour's aims. Clever bit of misdirection there :o)