VAT top of the agenda as Government prepares to tackle deficit

The coalition's honeymoon could be short-lived, given all the tax hikes that may be imminent...

Last Updated: 28 Oct 2010

Although the coalition agreement between the Tories and the Lib Dems covers a broad range of policies (in a pleasingly concise 7-page document), everyone involved in the new Government has been pretty consistent about the over-riding priority: tackling the UK's massive budget deficit and rising national debt. While this will inevitably mean huge cuts to public spending - almost £60bn a year by 2013/4, according to the FT - it will also mean tax hikes. We've already seen some of these - capital gains tax is going up, while the employees' NI increase won't be reversed after all. But a VAT hike is also looking increasingly likely; a BBC poll of top economists today reveals that most expect it to rise, possibly to 20%. As far as the Government is concerned, it probably looks like the least worst option...

Messrs Cameron, Clegg and Osborne have already been at pains to stress the scale of the task that faces them - 'the worst financial inheritance of any government in peacetime,' the new PM called it yesterday. And now they've got their feet under the table in Number Ten, the coalition partners will finally have to start coming clean on how they plan to start reducing the deficit. According to today's FT, the Treasury has already budgeted for annual savings of £37bn - but the new Government will need more than that to meet its targets. The Pink' Un reckons that it will have to find £57bn a year of cuts by 2013/14, more than a fifth of the £260bn public spending budget. There's no way this can be achieved without a substantial degree of pain. (And it could be worse, if the Government revises down the current growth forecasts).

Inevitably, tax increases will fund some of this (probably about 20%). The Government may have sensibly reversed the unpopular employers' NI hike planned by Labour. But employees' NI is going up, while capital gains tax is being raised to 40%, to bring it more into line with income tax (though apparently there'll be an exemption for entrepreneurs). However, raising VAT would be an even bigger earner: analysts reckon a hike to 20% would bring in an extra £11.5bn a year. And of all the potential tax rises, it's probably about the least controversial politically. No wonder, then, that 24 of the 28 economists polled by the BBC (all of whom are used as consultants by the Treasury) are expecting VAT to rise in the current Parliament - or that the majority expect the rise to be to 20%. Expect a marked upturn in the cash economy if that happens...

We all know what’s coming, and we all know it’s going to hurt. So the sooner they get on with it, the better. In the meantime, they should enjoy their new-found popularity while it lasts. After the Emergency Budget, it could be a very different story.

In today's bulletin:

VAT top of the agenda as Government prepares to tackle deficit
A billion for broadband as BT back in the black
Sainsbury's celebrates tasty results - but warns on VAT rise
Editor's blog: Sugar's TV freak show
Good news on NI - as unemployment soars again

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