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Budget VAT hike: to raise or to widen?

By Gary Gibbon

Updated on 19 June 2010

There are "billions of reasons" to raise VAT in Tuesday's budget, writes Channel 4 News Political Editor Gary Gibbon. But will it involve extending VAT's scope or putting up the main rate?

Budget box - ahead of next Tuesday's budget, delivered by Chancellor George Osborne (Getty)

Will the government reach for the VAT lever on Tuesday? There are billions of reasons for doing so - £4bn for every 1p rise in the main rate. And it's that main rate that many think the chancellor has his eye on. In a film on tonight's programme we asked former Treasury chiefs what they would do.
Norman Lamont is still a believer in extending the range of goods that come under VAT. But David Cameron was working for Norman Lamont back in 1993 when he tried to do just that and announce a phased increase of VAT on domestic fuel from zero to 17.5 per cent. Mr Cameron is said to be amongst those who were seared by that experience.

Norman Lamont says don't keep fighting the old wars, look again at extending the scope of VAT. And he has allies (see this IFS document just out, for example - many think we zero-rate far too many goods in the UK).
Jonathan Aitken, who was chief secretary to the Treasury under Ken Clarke's chancellorship, says you get "groans" when you put up the main rate but you get something much worse, full-scale rebellion, when you extend VAT.

The Tories suffered a grim luck typical of the Major years when a by-election cropped up in Christchurch, with its large retired population, soon after the March 1993 budget. The older voters rose up as one against VAT on domestic fuel, the Tories were trounced, and rebel Tory MPs helped to defeat the measure in a Commons vote in the wake of the by-election.
Geoffrey Howe put the main rate of VAT up from 8 to 15 per cent in his first budget in 1979. It was "rough going", he says, but he had advertised heavily in the 1979 campaign that the Tories wanted to shift from direct to indirect taxes.

And there was, critically, a "shift" - he was, to some extent, giving back with one hand what he'd taken with the other. "It's different for George," Lord Howe says, as "he hasn't advertised a rise" in an election campaign - the Tory mantra on VAT in 2010 was "no plans to raise VAT".
In the election, the Liberal Democrat leader dismissed VAT rises as a "cop-out" and "regressive." So will the Lib Dems stand up and fight against VAT rises? There does not appear to be any head of steam for that amongst Lib Dem MPs. One Lib Dem who wrote a pamphlet saying VAT should go up to 20 per cent (Giles Wilkes) has just been appointed special adviser to Vince Cable.
When the OBR report last week suggested the black hole wasn't gigantically bigger than Alistair Darling had already told us, there was speculation that VAT wouldn't go up after all.

But Tories instinctively believe that taxing spending is better than taxing earnings. They have ammunition they will deploy suggesting that VAT rises are not as regressive as some (their coalition partners included) often claim (the SMF as well as the IFS are helping the VAT case here). And they could deploy VAT increases to help to pay for some direct taxation cuts elsewhere. The classic Tory switch... but this time not advertised. Or not. 
We find out 12.30 Tuesday, when George Osborne gets to his feet.

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