Liberal Democrats call for annulment of wasted VAT cut

2.49.00pm GMT Wed 17th Dec 2008

Liberal Democrats lead opposition to the Government’s VAT reduction in the House of Commons

Vince Cable, Shadow Chancellor for the Liberal Democrats, introduced a motion to annul the Government's VAT reduction, declaring that the measure would do little for consumers it was designed to help.

Vince said the Liberal Democrats supported the principal of a fiscal stimulus, but that the Government had "grossly overstated" the idea that the VAT cut was the fairest way to provide this:

"There are very simple ways of testing the proposition that a tax change is fair. The Institute for Fiscal Studies...points out that the impact of the VAT change on the richest 10% of the population will be to make them 1.6 % better off, and the impact on the poorest 10% will be to make them only 0.6% better off. Obviously, most of the commodities most used by people in low-income groups, notably food, children's clothes and energy, at least at a lower rate, are exempt."

He went on to outline Liberal Democrat proposals for a "progressive change in the income tax system, cutting taxes for people at the bottom end of the income scale and raising them at the top by changing the system of allowances. That would have a differential effect on spending. It would be tax-neutral; it would not affect the deficit or public debt. However, it would provide a stimulus to the economy."

A further stimulus, said Vince, should come from a substantial programme of public investment in social housing, home insulation and public transport. (Details of Liberal Democrat plans to do this were published the following day.)

The Government, he said, had failed to properly analyse the behaviour of consumers who would attempt to save in view of future tax rises needed to pay for the cut and, as predicted deflation takes hold, wait for prices to fall further before spending. 

He said that with retailers already reducing prices in many shops by 20-30%, the VAT cut would barely be noticed.

The Liberal Democrat Shadow Chancellor also pointed out that the "enormous" £300 million administrative costs of implementing the tax cuts would particularly affect small businesses. The "managerial time and practical problems of conversion...will substantially reduce much of the benefits."

Despite Conservative support for the motion to annul the VAT changes, it was defeated with 223 votes for and 303 against.