Our opposition to the increase in the standard VAT rate from 17.5% to 20% from January stems from two key reasons-one social and one economic. On the social front, there is little doubt that VAT is a regressive tax. As the excellent Library paper on this specific emergency Budget proposal indicated, the poorest in society spend 18% of their disposable income on VAT, while the richest spend about 10%. For the poorest in society, VAT is more likely to hit necessary spending, but as one gets richer VAT costs tend to hit discretionary spending, and that is a very important distinction.
The increase in VAT will also leave people on fixed incomes terribly exposed. The Budget included real-terms cuts in benefits payments, given the change from the retail prices index to the consumer prices index for the calculation of benefit increases. Only today, we saw the levels of RPI at 5% and of CPI at 3.2%. The people dependent on welfare payments therefore face an unwelcome double whammy on their incomes, affecting their purchasing power-a theme to which I shall return later in my contribution.
There is always a lag between the human cost of a recession and the end of an economic downturn, so placing further pressure on the very people who are the true victims of the banking crisis by hitting their disposable income seems callous. Indeed, the VAT increase could actually deepen the human cost of the recession as social problems such as personal debt increase. For those of us on the left of the political spectrum, the steep VAT increase in the Bill, and its disproportionate effect on the poorest in society, contrasts with the treatment of the banking and economic elite, who have had a far easier ride in the emergency Budget. Social justice would demand that those responsible for the economic recession-with their irresponsible behaviour-and the subsequent budget deficit, which fixates the new UK Government, should pay more than their fair share. Although the VAT increase will raise £13.5 billion, the bankers will be subject to a feeble banking levy of £2 billion per annum when it reaches its full force-with its effect wiped out by the changes to corporation tax.
I deal now with the economic argument against the VAT increase in the Bill. VAT is essentially a tax on consumption. Considering that economic growth over the past decade was largely driven by consumer spending, resulting personal debt levels in the UK rocketing to the equivalent of 100% of gross value added, at £1.4 trillion, there is a medium to long-term economic case for addressing that unsustainable situation by reducing the dependence on retail spending in the economy and promoting production and manufacturing. Indeed, debt charities such as Citizens Advice report that the debt problems they deal with continue to increase as the human cost of the recession feeds into the system.
My preference would be to change the banking code and make it more difficult for lenders to seduce consumers into debts that they cannot service, rather than directly reducing the purchasing powers of individuals via the use of VAT. However, the major issue faced by the economy is a lack of demand. Growth in consumer spending will be the key if the UK Government are to reach the economic growth forecasts they have set in order to achieve their fiscal consolidation targets. The eminent economist David Blanchflower has argued that the Budget's VAT proposals will stymie the consumer-led growth on which it depends. The increase will also hit small businesses, which are the backbone of the economy in constituencies such as mine.
Importantly, the increase in VAT will also hit the public sector at a time when UK Government Departments are being asked to make swingeing cuts to their budgets. I should be very interested to learn whether the Treasury has calculated the effect of the VAT increase on the budgets of the devolved Administrations, and whether any consideration of the VAT increase has been made, given the stringent financial situation that the devolved Governments now face.
Furthermore, T he Guardian estimated over the weekend that charities could face additional costs of £150 million per annum as a result of the VAT increase. Considering that they are the very bodies that will bear the brunt of dealing with the human cost of the economic downturn, I must note that slapping an extra bill on the activities of those vital life-support organisations is a very worrying indirect consequence of the proposal. For those reasons I urge the Committee to support amendment 13 when we vote later.