The economy has been put into a tailspin due to coronavirus shutdowns. Rishi Sunak and the Bank of England have been making major moves to try and support it. A cut to VAT would boost consumer spending, and support retailers. But would cost the government money elsewhere.
Former Labour Chancellor Alistair Darling has come out in favour of the move, amid speculation that plans were being drawn up for the cut this weekend.
Rumours were circulating yesterday that a move under consideration is a 3 percent decrease in the sales tax from 20 percent to 17 percent.
Mr Darling, who was responsible for the economy during the 2008 financial crisis, has called for a cut to 15 percent in a new report from centre-right think tank Policy Exchange.
In his time in office, he cut VAT from 17.5 percent to 15 percent, a move which was heralded as having helped save the economy.
Coronavirus has sent the economy into a tailspin.
Rishi Sunak has a challenge on his hands.
Mr Sunak is mulling this move despite the fact that a five-point tax cut would lose £35billion in lost revenue for the government.
Former chancellor Sajid Javid has said that the current plan on the table, of a three point cut, would cost £21billion.
Mr Darling said in the report: “After the COVID-19 crisis subsides, we will enter a new period of recovery. Increasing taxes will not be the answer here, even as the budget deficit and government debt rises.”
“If anything, emergency tax cuts — slashing VAT to 15 per cent for instance, as I did in November 2008 — should be considered to boost consumer spending,” he continued.
A VAT cut would benefit consumers, but may have to be balanced out with increases elsewhere.
Reports at the weekend stated that a tax cut would only come if prime minister Boris Johnson eased social distancing measures.
The move could be announced in the chancellor’s early budget in July.
Fears are mounting that Mr Johnson is set to hike taxes, as the UK’s coronavirus deficit reaches £300billion.
The strain of the coronavirus on the economy has meant Conservative election promises not to increase income tax, national insurance or VAT are being tested to their limits.
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There is debate about how large the VAT cut should be.
Last week, the triple lock state pension was cast into doubt due to rising wages when people are taken of furlough, another of the Tory party’s election promises.
Another former chancellor, George Osborne has recently warned that the prime minister may be forced to U-turn on his promise not to introduce austerity measures.
Figures released last week showed a 12% increase in retail sales. Despite this, Sunak is anxious to support spending as other measures to support the economy are wrapped up.
The government’s job retention scheme is winding down, as companies look to October when the scheme officially ends.