UK VAT cut? Ian McConnell: Are Tories about to see some sense as cost-of-living crisis builds?

Think of the Tories and VAT and the things which come to mind immediately are the grave mistake made by the David Cameron administration to hike the rate to 20 per cent after coming to power in 2010, and the Margaret Thatcher government’s imposition of this tax on hot takeaway food in 1984.

It should have been obvious to Mr Cameron and former chancellor George Osborne that their huge VAT grab was a mistake, given the amount of money it sucked out of aggregate demand. Surely the economic consequences were not too complex for them to understand? Even if they were, the pair could always have contemplated how effective former Labour chancellor Lord Alistair Darling’s temporary cut in VAT from 17.5% to 15% had been in providing a desperately needed boost to the economy amid, and following, the global financial crisis.

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Then again, maybe the Tory VAT hike announced back in 2010 was all about ideology. That would have been in keeping with the Conservatives’ style. The Tories have proved no friends of ordinary people when it has come to VAT (and of course other policies) with the Thatcher administration’s imposition of the tax on the likes of fish suppers hugely controversial when it occurred nearly 40 years ago now.

The Tories made a great deal of what poor shape the public finances were in following the global financial crisis. In other countries too, of course, the public finances were hit hard given the global nature of the crisis. Yet the Tories’ dramatic representation of the situation seemed to be enough to make the Liberal Democrats, who had as a central plank of their 2010 general election campaign vehemently opposed a hike in VAT, roll over. The Liberal Democrats, after forming a coalition to prop up the Tories, then supported the very VAT rise over which they had issued dire warnings.

Of course, the Tories found money to slash the main rate of corporation tax, from 28% in 2010 to 19%. We were promised in 2011, by Mr Osborne, “a Britain carried aloft by the march of the makers”, something which never transpired as the corporate tax giveaway failed spectacularly to boost investment.

The VAT hike and monumentally ill-judged Tory austerity, including savage cuts to welfare, have weighed heavily on economic output for nearly 12 years now. Brexit has obviously exacerbated enormously the damage inflicted by the Conservatives upon the economy.

The UK now finds itself in the grip of a cost-of-living crisis, and the Tories have been mightily slow to react to a huge developing problem which has been obvious since late last year.

There has been talk that Boris Johnson wants a rethink on the planned hike in the main rate of corporation tax from 19% to 25% from next April.

This talk has been alarming, signalling an appetite or even impatience to make the same mistakes of the past, in this context declaring the public finances are in grim shape then embarking on an entirely ineffective, and very costly, programme of corporate tax relief relative to current plans.

Last week, however, there appeared to be a chink of light, with rumours emerging of a possible temporary cut in VAT from 20% to 17.5%.

The Tories tend to like regressive measures when making tax decisions, so it would be a pleasant surprise indeed if this particular rumour turns out to be true and the Johnson administration does provide some relief on the VAT front. Such a move would also be unusual in a broader context, given that wise decisions on tax and spending and the Tories have generally not gone hand in hand dating at least back to the Thatcher era.

The cost of a temporary cut in VAT from 20% to 17.5% has been estimated at £18 billion per annum.

Interestingly, the Liberal Democrats called for such a move in the spring. Maybe they have reflected on their errors of the past, when they were part of that coalition with the Tories which did such a poor job from 2010 to 2015. The Liberal Democrats also arguably helped enable the Brexit vote by propping up Mr Cameron (who was himself pro-Remain but overplayed his hand) so he could form a government.

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Whatever prompted the recent call by the Liberal Democrats on VAT, it is a sensible one.

There has been much talk of very specific VAT measures. These have included calls for a cut in VAT on petrol, and suggestions the tax is not charged on household gas and electricity bills.

With former chancellor Rishi Sunak’s 5p-a-litre cut in fuel duty in his March Spring Statement quickly much more than offset by the impact of a continuing surge in oil prices, it is easy to see why focusing too much on one area is not the answer, even if the cut in VAT on petrol was significantly larger. Likewise, removing temporarily the 5% VAT on household electricity and gas does not get anywhere near addressing the massive rises in bills.

What is needed is a big move, and one that particularly benefits those who have to spend all or most of what they have to live. In this regard, an across-the-board VAT cut is a no-brainer.

Much of the focus regarding inflation has, understandably, been on energy prices.

Energy regulator Ofgem in February announced a £693 per year or 54% hike in the energy-price cap for a typical dual-fuel customer, and this took effect on April 1.

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The regulator’s chief executive, Jonathan Brearley, estimated in late May that the annual price cap for a typical dual-fuel customer would rise from £1,971 to around £2,800 from October 1.

However, the UK’s inflation woe is widespread, as well as huge. So, while support for particularly lower and middle-income households to pay energy bills is absolutely crucial, the measures to address the all-encompassing cost-of-living crisis must also be broad in coverage and of sufficient scale.

Annual UK consumer prices index inflation had by May climbed to 9.1%, its highest since 1982 and the worst rate among the Group of Seven leading industrialised nations. The Bank of England is now forecasting annual inflation will rise to “slightly above” 11% in October. Annual inflation on the old, all-items retail prices index measure was 11.7% in May.

The huge scale of the inflation problem is surely evident, even to this Tory administration, as warnings of impending recession abound.

The big question, however, is whether or not a sharp, across-the-board reduction in VAT would stick too much in the craw of the Tories. Or can they put their ideology aside, at least for a short while?