UK firms: Raise VAT to cut deficit, not NICs

Business groups don't often call for tax hikes - but at the moment it's seen as the lesser of two evils.

Last Updated: 31 Aug 2010

UK firms are adamant that the Government needs to prioritise cutting the budget deficit – but they think a rise in National Insurance Contributions is a pretty dim way of doing it, according to the British Chambers of Commerce (we’re paraphrasing here). The trade body’s latest survey of UK firms reveals that although the majority are still worried about a double-dip recession, more than 40% want to see faster action on the deficit – but think that adding an extra 1% to VAT is a better option than a ‘tax on jobs’. Both main parties are supposedly thinking about raising VAT – but both know that they’ll alienate fewer voters by hiking NICs instead…

According to the BCC, three-quarters of UK firms don’t believe the recession is over for their business, while a similar proportion reckons the economy will slip back into negative territory before too long. However, they disagree with Alistair Darling that this is a good reason to leave the deficit-trimming until next year: 41% reckon that reducing the deficit should be the top priority for whoever wins the election this year. But the proposed 1% hike in NICs – due to kick in April next year – is not the way to do it, they argue. ‘Raising a damaging tax on business like NICs will be counter-productive,’ the BCC’s David Kern insists. ‘It will mean fewer jobs and less tax revenue in the long-term.’

A ‘less damaging’ option, they suggest (on the assumption that some kind of tax hike is inevitable), would be to increase VAT. Weekend newspaper reports suggested that both of the main parties are considering this after the election (although neither of them would dream of saying as much in public at this stage – a whopping across-the-board tax hike is no way to woo potential voters). The BCC reckons a 1% hike to 18.5% would raise about £4.5bn; throw in a few ‘targeted spending cuts’, and you’re not far off the extra £5.1bn the NIC hike is supposed to raise – but without the damaging effect on business.
Of course the BCC is a business group, so it would say that; consumer groups might argue that it’s neither fair nor sensible to shift the burden onto them. And numerically speaking, a VAT hike is likely to irritate a lot more people (not to mention its effect on inflation). On the other hand, growing businesses create jobs and drive recovery. So creating better conditions for growth - which means less red tape as well as a benign tax environment - will surely need to be at the top of the new Government’s agenda. But either way, it's going to hurt.

In today's bulletin:

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UK firms: Raise VAT to cut deficit, not NICs
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