The government considered raising value added tax to a record 18.5 per cent, it emerged last night, prompting the Conservatives to claim they had unearthed a “secret Labour tax bombshellâ€.
The inadvertent publication of an early version of the pre-Budget report documents revealed Alistair Darling, the chancellor, only decided at the last minute to abandon plans for the VAT hike in 2011-12.
The disclosure is politically damaging to Mr Darling, since it allows the Tories to suggest that Labour is planning additional tax rises if it wins the next election as borrowing rises to £118bn.
The Treasury insisted last night the VAT rise, which would have raised £5bn a year, was ditched by Mr Darling in favour of a 0.5 per cent rise in national insurance contributions and a new 45p income tax rate on high earners.
An official said those two measures combined raised about £5bn a year and there was no hole in the government’s forecasts for future revenue.
But George Osborne, shadow chancellor, said: “At the last minute Gordon Brown clearly decided to keep secret his plan to hit everyone with an extra tax rise to pay for his borrowing binge.â€
After Mr Darling delivered his statement on Monday, the Tories identified what they claimed was an unexplained £100bn rise in tax receipts over the next parliament, starting in 2011-12.
Mr Osborne claims the original plan to raise £5bn a year from raising VAT to 18.5 per cent accounted for part of that “black holeâ€.
Vincent Cable, Liberal Democrat Treasury spokesman, said: “The government has been at best incompetent and at worst highly duplicitous.â€
In his PBR statement, Mr Darling announced plans for a cut of VAT from 17.5 per cent to 15 per cent on December 1. The rate would revert to 17.5 per cent in January 2010.
But a Treasury study on the website of the Office of Public Sector Information, part of the National Archives, said: “The standard rate will then return to 17.5 per cent from 1 January 2010, and subsequently increase to 18.5 per cent in 2011-12.â€
The reference to the 18.5 per cent rate had been erased by the time the Budget documentation was printed at the weekend.
As Britain has the fourth lowest rate of value added tax in the EU, pushing up VAT to 18.5 per cent may have seemed attractive because it would have still left it well below the EU average of 19.5 per cent. Bill Dodwell of Deloitte said that whether or not it would make sense to push up VAT in 2011 would depend on the fragility of the economy.
The Treasury often makes its final decisions on Budget changes at a very late stage. The VAT increase would have raised more than £5bn in 2011-12, a similar sum to that raised by the increase in national insurance contributions, suggesting that the two options may have been considered as alternatives.
The Treasury said: “In all Budgets, ministers consider a range of policy options, most of which are rejected. As the chancellor said in his PBR statement to parliament, “we considered a number of options to raise revenue in future years, and I have chosen those which are fairestâ€.
Mr Dodwell added: “Either they thought about it and rejected it, or they decided that as it was a post-election event they would not mention it.â€
Copyright The Financial Times Limited 2008
http://www.ft.com/cms/s/0/3c6ade26-bb37-11dd-bc6c-0000779fd18c.html
The inadvertent publication of an early version of the pre-Budget report documents revealed Alistair Darling, the chancellor, only decided at the last minute to abandon plans for the VAT hike in 2011-12.
The disclosure is politically damaging to Mr Darling, since it allows the Tories to suggest that Labour is planning additional tax rises if it wins the next election as borrowing rises to £118bn.
The Treasury insisted last night the VAT rise, which would have raised £5bn a year, was ditched by Mr Darling in favour of a 0.5 per cent rise in national insurance contributions and a new 45p income tax rate on high earners.
An official said those two measures combined raised about £5bn a year and there was no hole in the government’s forecasts for future revenue.
But George Osborne, shadow chancellor, said: “At the last minute Gordon Brown clearly decided to keep secret his plan to hit everyone with an extra tax rise to pay for his borrowing binge.â€
After Mr Darling delivered his statement on Monday, the Tories identified what they claimed was an unexplained £100bn rise in tax receipts over the next parliament, starting in 2011-12.
Mr Osborne claims the original plan to raise £5bn a year from raising VAT to 18.5 per cent accounted for part of that “black holeâ€.
Vincent Cable, Liberal Democrat Treasury spokesman, said: “The government has been at best incompetent and at worst highly duplicitous.â€
In his PBR statement, Mr Darling announced plans for a cut of VAT from 17.5 per cent to 15 per cent on December 1. The rate would revert to 17.5 per cent in January 2010.
But a Treasury study on the website of the Office of Public Sector Information, part of the National Archives, said: “The standard rate will then return to 17.5 per cent from 1 January 2010, and subsequently increase to 18.5 per cent in 2011-12.â€
The reference to the 18.5 per cent rate had been erased by the time the Budget documentation was printed at the weekend.
As Britain has the fourth lowest rate of value added tax in the EU, pushing up VAT to 18.5 per cent may have seemed attractive because it would have still left it well below the EU average of 19.5 per cent. Bill Dodwell of Deloitte said that whether or not it would make sense to push up VAT in 2011 would depend on the fragility of the economy.
The Treasury often makes its final decisions on Budget changes at a very late stage. The VAT increase would have raised more than £5bn in 2011-12, a similar sum to that raised by the increase in national insurance contributions, suggesting that the two options may have been considered as alternatives.
The Treasury said: “In all Budgets, ministers consider a range of policy options, most of which are rejected. As the chancellor said in his PBR statement to parliament, “we considered a number of options to raise revenue in future years, and I have chosen those which are fairestâ€.
Mr Dodwell added: “Either they thought about it and rejected it, or they decided that as it was a post-election event they would not mention it.â€
Copyright The Financial Times Limited 2008
http://www.ft.com/cms/s/0/3c6ade26-bb37-11dd-bc6c-0000779fd18c.html
