VAT needs to rise to 20% in order to reduce the deficit and bring public debt down to a manageable level if not eradicating it all together.
Each 1% increase in VAT yields, roughly, £4.5bn in revenue – this is an opportunity that cannot be passed up. It is true that VAT was introduced by a Conservative government and all subsequent increases have been implemented by Conservative governments. The mistake is not the increase in VAT but the reduction, in 2009, to 15%. VAT does not impact massively on peoples lives apart from big purchases. Big purchases being Luxuries. Luxuries are not needed for one to survive.
The reduction in VAT was felt little by consumers and was introduced more to aleviate the fears of the retail industry. The ‘benefits’ were not largely felt by consumers. The experiment cost HMRC £11bn in lost revenue.
Of course a supply-demand analysis of the market will have to be consulted to make sure that it does not impact too negatively on the psychological well-being of retailers. However a variation of VAT in the Nordic countries, MOMS, averages 25%, it is not unfeasbale, considering that the Nordic economies are smaller, to expect something similar.
In a time when fiscal austerity is becoming the norm throughout the Western World – it makes perfect economic sense to raise taxes and cuts in the public sector.
Whilst I agree with the increase of VAT I also propose a full overhaul of the income tax system to make it fairer and progressive. I believe that a truly progressive income tax system would bring many people out of relative poverty whilst increasing revenue yield.
First published on The Oldfield-Pike Project