Update: Shadow Chancellor has denied plans to raise VAT if Labour wins upcoming election
Following acquisitions last night from the governing Tory party of a VAT rise plan, the opposition Shadow Chancellor, Rachel Reeve, has denied any such increase in the event of Labour winning the 4th July general election.
This follows Labour claiming last week it had no plans to raise Income Tax, National Insurance contributions or Corporation Tax. This just left VAT as the other major tax for an increase. Facing a huge debt burden and interest payments, with sluggish growth, it remains unclear how the next government will avoid major spending cuts.
The standard UK VAT rate is 20%. The EU average rate is 22%.
27 May 2024: Opposition boxes itself in on tax raising choices; repeat of 2010 financial crisis VAT rise an option
The UK’s Labour opposition, favourite to win the upcoming 4th July 2024 general election, has committed to no personal income, NIC or corporate tax rises should it win. Shadow Chancellor, Rachel Reeve, said today that there are “no plans’ for other rises. But she wouldn’t say what happens if she finds a “black hole” – and doesn’t rule out raising other taxes if she does.
Given the likely need for some tax rises and heavy spending cuts in the next years, the omission of a no-VAT-rise promise seems ominous.
Any next UK government will inherit the toughest outlook for the public finances in 80 years. Both the IMF and IFS argue that without significant tax increases a new government would be forced to cut spending.
The Labour leader, Sir Keir Starmer, pushed on 27 May whether he was ruling out a VAT increase said: “Well, we’ve drawn up our plans. They’ll be in our manifesto and you will soon see them.”
VAT is the third big tax in the UK (16% of tax revenues) after income tax and NIC. And, with the fourth major tax, Corporation Tax, just raised to 25% in 2023 and accounts for 9% of revenues, it looks like there are no other options.
And we’ve been here before – in 2010 the incoming Conservatives hiked VAT 2.5% to the current 20% to tackle Britain’s (then) record debts. A 2% rise to 22% would put the UK right on the EU average rate.
Labour has already said it will end the VAT exemption for private schools.
UK tax revenues (source: UK Parliament)
Low growth and high interest rates make grim fiscal picture
Labour has committed to get national debt down by the end of the next Parliament, aping the incumbent Conservatives’ targets. But insipid growth and punishing interest payments make this a hard target. It will be stretch to stabilise still rising debt in five years, let alone start to reduce it. Pressures of rising welfare costs and a new found vigour for defence spending will make it near impossible.
This means major spending cuts and / or tax rises. The expectations after an election win on it to raise spending on depleted public services will be huge. But Labour boxing itself in on no payroll-related taxes to fund current or higher spending may not seem wise soon.
VAT increase – 2010 debt crisis all over again?
The UK VAT rate of 20% was last increased in January 2011 (announced 20210) from 17.5%. This was imposed by a new Conservative government blaming the previous administration for leaving the country finances in a dismal state following the 2007/08 financial crisis.
The next government will face a Spending Review before year end.
UK still lags EU average 22%
Finland has recently announced a rise from 25% to 26.5% from September. This would make it second highest rate to only Hungary’s 27%.
This will push the EU average VAT rate to 21.8%. So an increase for the UK to, say, 22% would keep it within competitive range.
