Alistair Darling should consider temporarily cutting the rate of Value Added Tax by five per cent when he delivers his most critical and imminent Pre-Budget Report.
The call to the chancellor was officially made yesterday by the Centre for Economic and Business Research, as a way to get the economy through the recession.
It reflects the growing consensus that, on its own, the Bank of England’s decision to cut interest rates to a 53-year low will not provide enough of a stimulus to the economy.
An instant reduction in VAT from 17.5% to 12.5% at least until the end of 2009 would be a “good start”, said Doug McWilliams, the CEBR’s chief executive.
He estimated the gross cost would be £24billion, but said the net cost would be much less - “possibly [be] even nothing,” if the tax cut stops the recession from intensifying.
“The emerging evidence is that the position in the UK is so bad that it cannot be resolved without Keynesian measures,” Mr McWilliams warned.
“Additional public works would take too long to organise, though they may be part of the solution for later years. What is needed now is an early and possibly temporary tax cut”.
Experts at the Professional Contractors Group want the chancellor to take even bolder action if he is to revive the economy and keep his word on preserving the flexible labour market.
Managing director John Brazier has called Mr Darling to scrap both the Intermediaries Legislation – known as IR35, and the ‘income-shifting proposals’ in the shape of the Family Business Tax.
In a sign that tax relief may be in the PBR, Gordon Brown has spoke of an “emerging consensus” across the world that fiscal policy should be used in addition to monetary policy to “support growth.”
Firming up the prospect of a tax cuts, the Institute for Fiscal studies was reported on Saturday as thinking the case for a short-term fiscal loosening “looks stronger” than usual.
Director Robert Chote said any stimulus plan should be “big enough to have a noticeable impact on the economy and early enough to ensure that it kicks in before the recession reaches its trough.”
The Financial Times reported that a figure of £15bn, or one per cent of national income, was pitched for being “not impossible to imagine.”
For his part, Mr Darling has told colleagues that any tax changes he makes will be to help people through the downturn, with low to middle-income families and small firms the likeliest beneficiaries.
For example, a higher winter fuel allowance and a rise in the basic state pension are probable announcements, while tax rules for non-domiciled individuals are likely to be clarified.
Also in its forecast, the business advisor PKF said anti-avoidance measures to prevent abuse of the new entrepreneurs’ relief are possible, given the structure of the rules has become clear.
However, the chancellor’s biggest and most direct attack will probably be reserved for the City’s lavish bonus culture, in the shape of changes to approved company share schemes.
Nov 11, 2008
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