Mark Wadsworth

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Treasury Tomfoolery

There’s been an outbreak of common sense at the Federation of Small Businesses. From the BBC:

The FSB is urging VAT be cut to 5% in the construction and tourism sectors. “Consumer demand is a key barrier to economic growth so such a cut would encourage people to spend in these areas,” the FSB said in its Voices of Small Business Report.

The FSB said: “Evidence from other EU countries shows that any lost revenue to the Exchequer by making VAT cuts will be met by earnings from additional demand, jobs and the wider economic activity.”

Although the basic EU rule is that the standard rate of VAT has to be at least 15%, it appears that countries can reduce the rate on specific sectors, which is what Ireland seems to have done recently. So far so good. The depressing bit is right at the end of the article:

A Treasury spokesperson said: “Reduced VAT rates of the kind suggested would make a significant impact on revenue. Any claim that a boost to foreign tourism or construction would outweigh these effects would need to be looked at very carefully indeed.”

In other words, they didn’t give these secondary effects any thought whatsoever when they hiked VAT from 15% to 17.5% to 20%, did they? Even Ed Balls seems to have finally grasped that you cannot keep merrily increasing VAT and expecting overall tax receipts to keep going up, for crying out loud.


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