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FactCheck: VAT and spending cuts

By Channel 4 News

Updated on 14 January 2009

The party leaders trade claims at the first prime minister's questions of 2009, but do they get the numbers right?

The claim

"We're investing £10bn more in the coming year than last year on public investment. There will be more investment in our schools and in our education than at any time in our history this year, and then next year...

Gordon Brown, prime minister's questions, 14 January 2009

The analysis

Listen carefully - Brown's first claim almost makes it sound as though public investment is going up by £10bn in one fell annual swoop - though on closer examination this isn't what the detail-obsessed PM actually says.

According to the pre-budget report, public sector net investment stood at £29.9bn in 2007-8. It's set to increase to £36.5bn this financial year, and increase again to £40.4bn in 2009-10.

So there's the £10bn - or £10.5bn, in fact - increase in two years. And that's not the end of the story.

After that, public sector net investment is due a £7.4bn cut in 2010-11. Although Brown doesn't claim otherwise today, it'd be remiss of us not to point out that the trend of rising investment is set to end (post-recession, according to government predictions) with a sharp bump.

As a proportion of national income - arguably the more useful way in which to compare public finances over time - investment is set to peak at 2.7 per cent in 2009-10. It is then set to drop by almost a percentage point, to 1.8 per cent, in 2013-14.

This is still comfortably higher than the 0.6 per cent Labour inherited in 1997-98, but it does mean the days in which Labour can claim record investment are tightly numbered.

Pre-budget report 2008

The claim

"...The leader of the opposition says there'd be a lot less next year - yes there'd be a lot less if he was in power - the fact of the matter is there'll be a lot more as a result of the decisions we have made."

Gordon Brown

The analysis

On to the next part of Brown's claim: almost as an aside he tells MPs there'd be a lot less money under the Tories.

It's true that - unlike Labour, which sees extra spending now as essential to help get the country out of the downturn - the Tories want to reduce the growth of public spending from early 2009.

It's worth noting, however, as Brown reels out this attack line directly after talking about education investment, that the Tories have said they will protect spending on schools - though not education as a whole.

Whether the Tories would, technically, cut spending - something on which Brown attacks the party several times in today's PMQs - isn't quite that clear-cut.

It's true that, if the Tories won a shock election next month, there would be less public spending in 2009-10 than there would be under Chancellor Darling. Cameron kicked off 2009 by calling for £5bn spending cuts to fund tax cuts.

But technically, the Tories still want to increase public spending - but by a much lower rate than Labour would.

Whether this is a cut depends on how you want to look at it - - it's something we looked at before the 2005 election, and something which may well rear its head post-2011, when none other than Labour has pencilled in a reduction in the increase of public spending to the tune of £37bn.

The claim

"At the end of every week the typical family has more than £5 extra in their pocket. It may not matter to the people on the opposite bench that £5 extra is in their pocket - that's £275 more in a year - as a result of the cut in VAT."

Gordon Brown

The analysis

The government cut the tax on sales from 17.5 per cent to 15 per cent for 13 months starting December 2008. This forms the priciest part of the fiscal stimulus package announced in the pre-budget report, to the tune of £12.4bn.

Dividing the whole cost of this measure by the number of families in the country (31.8 million) gives a slightly higher figure than the one Brown quotes - more like £6.90 a week.

But this is only one kind of "average" - the amount by which an individual family stands to gain from the VAT change depends on how much they spend.

If we look at the median family - if all the households were lined up, the median would be the one in the middle - then the effect would be closer to the £5 a week figure quoted by the government, David Phillips of the Institute for Fiscal Studies told FactCheck.

IFS analysis of all the pre-budget report measures implemented this month - changes in duty, child benefit and cash for pensioners as well as the comparatively giant VAT cut - showed the poorest 10 per cent of households would gain by the least in cash terms - £5.43 a week.

Those in the middle of the income distribution would gain by around £7-8 a week, and the big spenders in the top 10 per cent would gain by £17.94 a week.

IFS briefing note (.pdf)

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