The Shadow Chancellor calls for an emergency VAT cut amid poor retail sales figures. But Nick Clegg says Labour’s plans are “bankrupt”, and an economist tells Channel 4 News the move would cost £12bn.
He said Chancellor George Osborne should reduce VAT back down to 17.5 per cent to stimulate consumer spending, bring down inflation and boost job creation. Mr Osborne raised the tax to 20 per cent in January.
In a keynote speech setting out Labour’s economic policy, Mr Balls said: “The question is not the cost to George Osborne of paying for this temporary emergency tax cut, but the price our country will pay if he carries on regardless.
“Slowing down the pace of deficit reduction with a temporary VAT cut now would give the flat-lining economy the jump start it so urgently needs, boost jobs and be a better way to get the deficit down for the long term.”
Mr Balls’s speech came amid grim news from the high street. British retail sales dropped twice as fast as expected in May. High street sales fell by 1.4 per cent last month, signalling the end of the Royal Wedding boost and the bank holidays.
But Mr Balls’s plan was slammed by Deputy Prime Minister Nick Clegg.
He described Mr Balls’s failure to recognise Labour’s role in causing the crisis and to see what needed to be done to rebalance the economy as “intellectually bankrup, fiscally bankrupt and politically bankrupt”.
“And then, to top it all, the cherry on the cake – a whopping great big multibillion-pound unfunded tax cut. People aren’t that daft. Until Labour recognise that, I think they are going to be in a very bad state indeed come the next election.”
“There is no doubt a VAT cut would help the economy,” Vicky Redwood of Capital Economics told Channel 4 News.
“It will free up money for households to spend. So there is an economic justification for this but there is equally a political element. Labour has been criticising the Coalition’s plans as going too far.
“It should help consumers but there’s a risk that it will have a negative effect, markets and people will stop believing the Government is committed to reducing the deficit and people will worry we are going to become Greece. It will also cost £12bn.
“It’s uncertain. It’s risky both ways. If we knew what to do we would not be having all these conversations over plan A and plan B.”
George Osborne has pursued a strategy of spending cuts to boost the economy, a plan recently endorsed by the International Monetary Fund. But he has refused to countenance the possibility of a “plan B” in case his strategy does not work.
Labour believes spending cuts are a mistake and cutting the deficit is not the priority until the economy is growing again.
“George Osborne risks joining the ranks of chancellors, finance ministers and economists who should have known better, but allowed political imperatives to trump economic realities,” Mr Balls said.
“I do not believe this is economic judgment at work – but a political gamble with the nation’s economy from a Chancellor shaping his policies not around constitutional responsibility, sound economics and the protection of jobs, growth and homes, but around a fixed political strategy to win an election in 2015.”