Did Darling plan a VAT hike?

Speculation is rife this morning that chancellor Alistair Darling reversed a plan to increase VAT to 18.5 per cent just hours before he delivered Monday’s pre-Budget report.

The facts:

Darling has denied the rumour that he was in favour of the tax increase, which would have nudged VAT one per cent higher. This despite a Treasury document being published online by mistake, which suggested bringing in the hike from 2011.

The chancellor announced a 2.5 per cent cut in VAT at the pre-Budget report on Monday. The change brings the rate to 15 per cent and takes place next Monday. The Treasury today stated that the idea had been ruled out by the chancellor well before the pre-Budget report took place.

Nevertheless, the Conservative Party rounded on the mistake, claiming it was further evidence of the Labour government’s “secret tax bombshell”.

According to the leaked online document: "The proposed changes will reduce this [VAT rate] to 15% from December 1 2008 until the end of 2009. The standard rate will then return to 17.5% from January 1 2010, and subsequently increase to 18.5% in 2011-12."

The development came as the Conservatives were granted an “emergency debate” on the pre-Budget report and while the influential Institute for Fiscal Studies (IFS) warned that tax increases outlined in the report would not be enough to plug the UK’s yawning budget deficit nor boost the economy significantly.

The IFS said the big earners would get around the increase in the top bracket of income tax, for example, by contributing more to pension funds and charities, or by leaving the UK altogether.

They said:

Tory chief David Cameron said: "They said no hidden manifestos, everything above board, show you how we will pay for our policies. And now we know they are planning this extra tax rise.

“That is why the budget doesn't add up, that is why there is such a big black hole, that is why everyone is saying this budget isn't convincing. There is a secret tax bombshell coming down the road at every family in the country."

A Treasury spokesman told the BBC the VAT increase was "an option that was considered and rejected".

According to the BBC report, the spokesman added that the chancellor had made it clear in his pre-Budget statement that, "a number of options to raise revenue in future years" had been considered and he had "chosen those which are fairest".

We say:

It’s another government gaffe, but we have to admit this sounds like a storm in a teacup. Of far greater concern is the IFS report suggesting that Darling’s tax plans will make little impact on the economy.

This is galling given that the country is almost certainly in recession and its budget deficit is set to hit £1 trillion.

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By News Desk  on   Nov 26,2008

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Keywords

pre-Budget    VAT    Alistair Darling    David Cameron    tax   

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