2011 VAT increase – Progressive or oppressive?

10th January 2011

2011 VAT increase takes the standard rate to 20%

With the Conservative government clashing over the viability of their 2011 VAT increase of 2.5% with the Labour government, it’s becoming increasingly evident that the rise is more of a permanent feature than a temporary deficit easing policy. However, is it possible that the increase could go down in history as being the progressive policy the Conservatives believe it to be, reducing the UK budget deficit without increasing unemployment or impacting harshly on those worst off? Or will it put the British economy back to the dark days of 1989, swinging the tax burden too heavily in the direction of the less well-off.

Firstly, the tax rises come with a significant set of provisos that remove certain purchases from the impact of them. These include food, children’s clothing and bizarrely newspapers and magazines. While the first two exclusions will obviously help to ensure that those less well-off are not impacted in terms of the bare necessities, the latter two don't seem to have any real reasoning (although it could have the unintentional - obviously - result of keeping the media sweet).

However, if the same people have to pay more to pick up their groceries, pick up their kids from school or just get into work because the VAT increase has impacted fuel prices then this will inevitably mean that they have less to spend on the bare necessities in the first place. The same would apply if their cooker breaks down or if a work shirt gets ripped or a window gets smashed. Either way, the VAT increase is going to have a significant impact on the less wealthy sections of society, irrespective of the exclusions.

At the same time as being affected by the increases in this way, they are also earning less money than wealthier sections of society, so it follows logically that the tax rise should have a disproportionate impact on the poor. They earn less money but have to pay the same incremental increase in VAT, so they will end up with much less money for food and children's clothing. This is the same criticism that the Conservatives faced back in 1989 with the introduction of 'poll tax' which saw all households, irrespective of earnings, pay the same housing rates for local council costs.

While the exclusions are a step in the right direction to take the burden off certain necessary purchases, it could be said that they do not go far enough to mitigate the disproportionate burden of the 2011 VAT increase on the less affluent sections of society. Maybe a better solution would have been to couple the general increase with a 2.5% reduction of VAT on food and children's clothing. Either way, more could be done to ensure that the increase doesn't end up doing more damage than good in the long term.