Labour to rule out VAT rise in election manifesto

http://www.theguardian.com/politics/2015/mar/23/labour-to-rule-out-vat-rise-in-election-manifesto

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Labour will rule out a rise in VAT in its general election manifesto as it seeks to put pressure on the Tories to say what they will do with “the tax that hits everyone”.

In one of the party’s biggest announcements before the launch of its manifesto, Ed Balls will say that Labour will stick to its record over the past 40 years of never raising the headline rate of value-added tax. This contrasts with the Tories, who introduced VAT under Ted Heath in 1973 as part of its accession to the EEC and who raised the headline rate 1979 and 1991.

The shadow chancellor will say in a speech in Birmingham on Tueasday: “VAT is the tax that every Tory government in the last 40 years has raised. But no Labour government has ever hiked up the main rate of VAT.

“We will make our tax commitments in full in our manifesto. But I am clear that while millionaires have been given a huge tax cut, working people are paying more in tax after the last five years of the Tories.

“So today I can announce a clear pledge to the British people. The next Labour government will not raise VAT.”

The announcement by Balls is designed to increase pressure on George Osborne who raised VAT from 17.5% to 20% in his emergency budget in June 2010. The rise came into effect in January 2011. David Cameron famously said before the 2010 election that he had “absolutely no plans” to raise VAT while the Liberal Democrats warned of a post-election VAT bombshell.

Labour believes it has spotted a chink in the Tories’ fiscal armour in the wake of the budget. The independent Office for Budget Responsibility said that the Tory fiscal plans suggested even deeper cuts in day-to-day government spending in the three years from 2016.

The Tories have said that they will not increase taxes – other than raising an extra £5bn in tax avoidance measures – and will instead closing the fiscal gap through £12bn in welfare cuts. But the Tories have declined to spell out the details of these cuts, giving Labour the chance to challenge the chancellor to make clear whether he would repeat the tactics of his last emergency budget in 2010.

Balls will say: “VAT is the tax that hits everyone – with the same rate paid by the pensioner as the millionaire. It’s the tax that hits you every day – whether you’re stopping at a café for a cup of tea or filling up the family car. It’s the tax that you pay from the first pound that you spend.

“It’s the tax that hits pensioners and the poorest hardest. For many pensioners and those on the lowest incomes, it’s the biggest tax they pay.

“But the Tories and Lib Dems raised it within weeks of the last general election – despite David Cameron telling the British people a few days before the election that he had ‘no plans’ to do so and despite the promises of Nick Clegg.”

Balls has a strong record of opposing rises in VAT on the grounds that it hits the poor harder because they spend a greater proportion of their income on items subject to the tax.

The shadow chancellor argued behind the scenes in the runup to the 2010 general election that Labour should give a definitive commitment that it would not touch VAT, which stood at 17.5% on polling day.

Alistair Darling, the former chancellor who had cut VAT to 15% on a temporary basis at the height of the recession between late 2008 and January 2010, had said it would be wrong to bind his hands.

VAT was introduced after Britain joined the EEC in 1973 at an initial rate of 10%. Denis Healey, the former Labour chancellor, reduced the standard rate to 8% in 1974. Geoffrey Howe, Margaret Thatcher’s first chancellor, raised the main rate to 15% in his first budget after the 1979 election. Norman Lamont, John Major’s chancellor, increased the rate to 17.5% in 1991 to help pay for changes to the poll tax.

Labour says it will be able to answer Tory criticism over how it will meet its fiscal plans. It will levy a mansion tax on properties worth more than £2m to help pay for a £2.5bn “time to care” NHS fund.

It is also planning to tackle the budget deficit in a more benign way by pledging to reduce in year on year rather than setting a definitive date for its elimination. Labour will also pledge to balance the current budget, leaving more room for borrowing for capital investment.