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​My Take on the VAT Pledge: Labour and Conservatives Stance

​My Take on the VAT Pledge: Labour and Conservatives Stance

Posted by Stelios on 30th May 2024

As the general election approaches, the political landscape is heating up with pledges and promises from the main parties. One significant promise that caught my attention is the Value Added Tax (VAT) stance. Labour and the Conservatives have now explicitly ruled out raising VAT if they win the upcoming election.

Financial Statement and Budget Report by the Chancellor of the Exchequer - ID 41772 ©UK Parliament/Maria Unger, CC BY 3.0, via Wikimedia Commons

In a Telegraph article, Chancellor Jeremy Hunt made the Conservatives' position on VAT crystal clear: they will not increase the standard rate of this sales tax in the next Parliament. He even went so far as to challenge Labour to make the same commitment, implying that they had been less than forthcoming on the issue in recent interviews. However,Labour's shadow chancellor Rachel Reeves swiftly dismissed any talk of a planned VAT increase as baseless and echoed Hunt's pledge.

This exchange comes amid a broader debate over spending plans as the official five-week election campaign period kicks off. Labour has vowed to ensure economic stability and has also ruled out raising income tax and National Insurance, sticking to its promise of fiscal responsibility. Interestingly, it supports the government's recent 2p cut to National Insurance, which was announced in the March Budget.

When Rachel Reeves was pressed on whether Labour could rule out a general VAT increase, she confidently stated that Labour did not need to increase this levy to pay for its policies. Despite this clear stance, Hunt accused Labour of harbouring a "plan to increase VAT" if they come to power, arguing that such a move would "hammer families' finances" and potentially raise inflation.

Reeves responded to these accusations by reaffirming that Labour will not increase income tax, National Insurance, or VAT, emphasising her desire to see lower taxes on working people. Hunt, however, framed Labour's announcement as a concession made under Conservative pressure.

Prime Minister's Questions, 7 February 2024 02 © UK Parliament / Maria Unger, CC BY 3.0, via Wikimedia Commons

Now that both major parties have ruled out increasing VAT, income tax, and National Insurance, they are vying for voters' trust by pledging not to raise personal taxation's most significant revenue sources. They also commit to reducing national debt as a share of GDP within five years, per their self-imposed fiscal rule. Despite these commitments, both parties accuse each other of having unrealistic spending plans and creating financial black holes.

The Institute of Fiscal Studies (IFS) recently highlighted the precarious state of public finances, noting that high-interest payments on existing debt and low expected economic growth could make reducing future debt challenging for whichever party wins. This brings a critical perspective: while Labour and the Conservatives have promised not to increase VAT, they haven't mentioned any plans to lower it. If either party intended to reduce the standard VAT rate, now would have been an opportune moment to announce such a move.

In summary, while it's reassuring that neither Labour nor the Conservatives plan to raise VAT, it's equally telling that there's no indication of a potential reduction. This omission suggests that maintaining the status quo on VAT might be the most realistic approach for both parties amid the current economic climate.

Main Photo Source: NHS Confederation, CC BY 2.0, via Wikimedia Commons