Orders of the Day — Value Added Tax

Part of the debate – in the House of Commons at 12:00 am on 5 December 1972.

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Photo of Mr John Pardoe Mr John Pardoe , North Cornwall 12:00, 5 December 1972

They have usually argued for what I spent the last four years of the Labour Government arguing for, namely that we should right the balance in favour of the lower income groups by means of a massive redistribution through family welfare benefits. The reason why the Labour Government could not do that was that they could not impose the taxation needed to redistribute through family allowances and so on.

To return to the speech of the right hon. Member for Leeds, East and his remarks about VAT being unjust, if he is so concerned with justice I should like to hear him argue for the harmonisation of taxes between ourselves and the Common Market on such commodities as beer. If we harmonised our beer tax, there would be 4p off a pint. If we harmonised our tobacco tax there would be 13p off 20 cigarettes.

In the context of redistribution, I prefer to refer the right hon. Member for Leeds, East to an exchange which took place in the House last week in the course of the debate on the Social Security Bill. The right hon. Gentleman will find it in columns 264 and 265 of HANSARD for 28th November, 1972. The hon. Member for Rotherham (Mr. O'Malley), leading for the Opposition, argued against the Government's proposal in their new pensions Bill to pay for flat rate pensions by means of earnings-related contributions. I cannot think of anything more redistributive than that and, as I indicated at the time, I thought that it was extraordinary that the Labour Pary should oppose it. Therefore if the right hon. Member for Leeds, East argues in favour of redistribution and social justice in the tax system, he must look more closely at his party's proposals for national insurance and the contributions which have to be levied.

My difficulty in this situation is that when my party advocated VAT it was part of a wholesale reform of the taxation system. Today we are discussing only one part of that reform. The reform in total would have added greatly to the redistribution of income and to the justice and fairness of British society. VAT is only one part of that. It will have an impact on the lower paid, and that impact must be compensated for by means of a redistribution of income through higher family allowances or by means of what the right hon. Member for Stafford and Stone includes in his amendment—what I call a credit income tax—which again we have supported and indeed which we initiated.

Of course, the tax will have an impact on low-paid families. There will be new taxes for them to pay on such goods as children's clothing and children's shoes. I do not think that the impact will be very great, but it will be politically if not economically significant. That is important to those of us who want to introduce VAT.

The best way to make up for that is by increased family welfare allowances. If they are not prepared to accept the amendment of the right hon. Member for Stafford and Stone, which I would totally accept, that we should wait until a credit income tax is introduced, the Government must accept the arguments enshrined in figures that I shall now give. Family allowances were introduced in August, 1946, when a family of three children could expect to receive a weekly allowance of 10s. or 50p in decimal currency. In 1972 the figure is £1·90, but that is worth 2p less than the 50p in 1946. Its purchasing power is the equivalent of 48p in those days, because of inflation. Therefore, we should compensate the low-paid families with substantially increased allowances, an argument I have put to both Labour and Conservative Governments.

Our amendment is in two parts. Obviously, I cannot speak to it in detail as it has not been selected, but I am desperately concerned, as are many hon. Members on both sides, with the impact VAT will have on prices. The first part of my argument is that the rate should be not 10 per cent. but 7½ per cent. One reason for choosing that figure is that the legislation allows for any rate between 7½ per cent. and 12½ per cent., and therefore we should not need new legislation. I might well have preferred to argue for 7 per cent. on the ground that the Chief Secretary argued last week, as reported at column 217 of HANSARD for 28th November, that the 11¼ per cent. rate of purchase tax is the equivalent of a 7 per cent. rate of VAT.

But I do not argue purely in those terms at this stage. I make my argument in terms of macro-economics. The revenue from SET is now running at about £200 million a year, and that from purchase tax at about £1,275 million, making a total of £1,475 million for the two taxes that are to be replaced. We are to replace them by a tax on cars yielding about £125 million and VAT yielding £1,475 million, making a total of £1,600 million. Therefore, a 2½ per cent. reduction of VAT would cost about £370 million, by my calculation. The right hon. Gentleman may be able to do his own. The difference between the two totals is 0·3 per cent. of consumer spending. Therefore, there is no reason why the cost of living need rise by more than 0·3 per cent. of the total. But we all know that it will rise rather more than that.

The right hon. Member for Leeds, East said that a 2½ per cent. reduction would bring the tax yield £300 million below that of the taxes it replaces. I beg to differ; it would do no such thing. A tax of £1,600 million would replace a total tax of £1,475 million, which means an increase of £125 million. If we reduced it by 2½ per cent., or £370 million, it would mean a reduction of £245 million instead of the £300 million of which the right hon. Gentleman spoke. It is as well to get our mathematics right at this stage. The TUC has argued for a 2½ per cent. reduction on the grounds that it would reduce the retail price index, at one stroke, by 0·9 per cent.

I should like briefly to deal with the detailed effect on individual prices. Although the total macro-effect on prices of introducing VAT should not be great, we all know that it will have a major effect because of the psychological effect. Expectations will rise. That is one of the major factors in increasing inflation. Unfortunately too, many interests will be waiting to use VAT as an excuse to increase prices unjustifiably.

Therefore, when the Government say, as their spokesmen have implied in the past, that a price increase will be cancelled by a reduction elsewhere, we are all entitled to ask, "But will it? Will prices come down for those goods for which VAT is lower at present than purchase tax?" The problem is that there will be a confusing variety of price changes, which will make it easy for those who wish to take the public for a ride to make unjustified price changes. I remind the Chief Secretary of the instance in Germany, where the tax was introduced to take effect from 1st January, 1968, but hotel prices to take account of it went up a week before Christmas, before the hotels were being charged the tax. We must stamp out that kind of abuse of the system before we even go any further along the road.

Let us take the range of goods—about £4,000-million-worth—where purchase tax is now 11£ per cent. On wholesale value, according to the Chief Secretary, that is equivalent to 7 per cent., but according to the Economist it is equivalent to 10 per cent. VAT, which only adds confusion to confusion. The purchase tax covers clothing and footwear but not children's clothes or children's shoes. It includes floor coverings and most furniture, domestic hardware and tableware. But how can we tell these items from those now charged at 20 per cent., such items as confectionery, soft drinks, icecream and pet foods? Their prices should come down, but will they? How will individual consumers know which should come down, which should go up and which should stay the same? The Government can no longer say "They can shop around", or, "Competition will do the trick", because by introducing the Fair Trading Bill, so-called, they have admitted that competition is no longer the archetypal protector of the consumer that it was deemed to be in the days of Selsdon.

There is considerable confusion in consumer durables. Some are charged at 25 per cent., but not all. A 25 per cent. rate of purchase tax is equivalent to about a 20 per cent. rate of VAT. That is the Economist's estimate. The Chief Secretary may well have a different calculation. Going by that figure, we see that prices should fall by about 10 per cent., but purchase tax is not comprehensive in that range, so some prices should go up and some should go down. A small freezer costing £50 today should fall to £46, but a large freezer costing £71 should rise to £78.

So much for the confusions of purchase tax and VAT. What about SET? Service firms now pay SET, but rarely pay anything like as much as 10 per cent. on their turnover. I doubt whether any service firm pays that amount. Therefore, the cost of most services will rise, but it is impossible to calculate by how much they should rise. For example, if I query with a service operator the price he is charging me he may say one of two things. He may say "SET was a negligible part of my turnover. Therefore, I must put the price up by the full 10 per cent.", or "Yes, SET has been removed, but its removal is not immediately effective from 1st April." Therefore, even a well-informed consumer could be taken for a ride and find himself hitting his head against a brick wall.

What will happen where hotels and restaurants have charged a special SET surcharge on their bills, usually far in excess of the SET they have paid? Will it now be absorbed into the basic price with VAT charged on top, or will it be replaced by a VAT surcharge?

In trying to forestall these objections, the Chancellor said today that the Government would take steps to tell consumers how VAT would affect prices. But what effective steps will he take to protect the housewife in the extraordinary confusion that will inevitably arise? He promised some rather vague machinery as part of the policy for going beyond the 90 days' freeze. What I want to know in far more detail from the Government tonight is how that will work. If the Government told us that the rate would be 7½ per cent. and that they would set up an effective consumer board to ensure the prevention of what happened after the introduction of decimal currency and of SET, when the changes were used as an excuse for unjustified price increases, I should have no hesitation in voting, and recommending my hon. Friends to vote, in favour of the imposition of VAT from 1st April next year.

Can a rate of 7½ per cent. be afforded? I believe that it can. In 1960 taxation was about 14 per cent. of total personal income. By the end of the decade it had risen to 20 per cent., and it is now back to 18 per cent. But with the natural buoyancy of the Budget, with the effect inflation has had on taxes on lower incomes, bringing many of those who were taken out of the taxation range by the last Budget back into it again, we are getting very near to 20 per cent. The Government can easily afford the £370 million that it would cost to reduce the rate of VAT to 7½ per cent. from 10 per cent.

It is no good for the Government to tell us that they must introduce the tax on 1st April because it is part of our commitment to our entry into Europe. The right hon. Member for Stafford and Stone said that we could not go into Europe making exceptions all over the place. I do not see why not. We do not have to dot every "i" or cross every "t" of all European policy. The Italians have delayed the introduction of the tax for 14 years, and the French are constantly asking for exceptions to the rules. There is no reason why we should not do so.

The real date that worries the Government is not 1st April 1973 or even 1st January 1973. It is the date of the next General Election. They do not want to defer the introduction of the tax, because it would then come into effect far too close to the General Election, with all the short-term consequences and the short-term unpopularity.

It is not my job to worry about the Government's problems at the next General Election. I have no intention of voting in such a way as to ensure that those problems are minimised. The Government are free to have our support tonight if they wish. They may decide that they do not want it. But as the Parliamentary Liberal Party is due to be increased in size by at least one on Thursday they might start taking it into account as a numerical factor in their calculations. To gain our support, they will have to accept the two parts of our amendment which has not been selected for discussion.