Cameron pledges no increase in VAT

David Cameron Gestures

David Cameron wrongfooted Ed Miliband at their final prime minister’s question time encounter on Wednesday by echoing Labour’s headline-grabbing pledge not to increase VAT.

As set out in last week’s budget, the Tories’ fiscal plans do not include tax rises. But they do require painfully deep cuts in public spending, of more than 5% each year, which the Institute for Fiscal Studies pointed out are “twice the size of any year’s cuts over this parliament”.

George Osborne’s riposte is that he will temper the size of those cuts by making (unspecified) welfare cuts of £12bn a year, and by saving £5bn through blocking tax evasion.

But the IFS has made clear its suspicion that when it comes to the crunch, the next government is likely to have to increase taxes to make the sums add up. As it points out, each of the last five general elections have been followed by net tax rises of more than £5bn.

VAT is favoured by chancellors because a small tweak brings in huge sums: a one percentage point rise raises £5.2bn, almost as much as a 1p increase in all rates of income tax. But it is a particularly regressive option, hitting the poorest groups hardest. Alternatives include increasing national insurance across the board (something Labour has ruled out), which would bring in £4.9bn.

Labour’s problem is less acute, because it has set itself less stringent fiscal targets for the next parliament. While Balls has promised that a Labour government would eliminate the deficit as soon as possible, he would also allow himself to take advantage of rock-bottom borrowing costs to fund long-term investment.

This means that, as IFS director Paul Johnson put it, “Labour would be able to meet its fiscal targets with no cuts at all after 2015-16”. Which explains why Balls and his colleagues have been a bit more free and easy in ruling out tax rises. They had hoped to use that extra fiscal leeway to wrongfoot the Tories; but so far that strategy appears to have failed.

Powered by Guardian.co.ukThis article was written by Heather Stewart, for theguardian.com on Wednesday 25th March 2015 17.04 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010