The VAT Question

Notoriously economists are fickle people.  The gag goes that if you put 10 economists in a room, you will get 12 different opinions.  Yet over  the last couple of days, economists have been queuing up to push for a VAT increase, with a rise to 20% being the favoured option.

While the temptation would be there to put this rise through, after all those economists  say that a rate of 20% would bring in £11.5 billion a year.  The question has to be asked about the damage this would cause to the economy.  Prices going up would lead to artificially higher inflation figures, while the higher price of goods would mean a lot less money in people’s pockets, at a time where we need money to circulate in the economy.  It would not be just the government broke, as many people would see their money disappear with VAT-inflated prices.

Of course while the Tories prided themselves as being the party that cuts taxes, VAT has proven to be the Tories favourite stealth tax.  They introduced the original 15% rate in Geoffrey Howe’s first budget in June 1979, while in 1992, they put VAT on fuel after promising not to do so during that years General Election.  It may well be that before the cuts, the decision on VAT will be an early indicator of whether the Tories really have shifted to the left.