Balls calls for immediate VAT cut 'to jump-start economy'

16 Jun 11
The government should cut VAT urgently to boost economic growth, shadow chancellor Ed Balls said today.

By Richard Johnstone | 16 June 2011

The government should cut VAT urgently to boost economic growth, shadow chancellor Ed Balls said today.

Speaking at the London School of Economics, Balls said that Chancellor George Osborne’s deficit reduction plan was a ‘political gamble’ that risked the long-term prosperity of the UK.

In his first major policy speech since becoming shadow chancellor in January, Balls called on the government to slow the pace of the deficit to ‘jump-start’ the economy. Cutting the VAT rate temporarily back to 17.5% would ‘be a better way to get the deficit down for the long term’.

He said that while the UK had missed a double-dip recession ‘by a whisker’ in the past six months, it had lost ground over the past year to other economies due to the government’s policies of ‘rapid tax rises and spending cuts’.

‘While the American, German and French economies have already recovered to their pre-crisis levels of output, we in Britain are still 4% below that level,’ he said.

Latest forecasts from the Office for Budget Responsibility implied ‘that by the end of next year we will be £5.6bn worse off as a country’, Balls said. ‘The cost of that slower growth is equivalent to a loss of income of over £300 for every family.’

He argued that this lost wealth could rise to £58bn in 2015 – equivalent to £3,300 for every family in the country. ‘So the test for the Treasury isn't just whether they can post better growth rates – we all know the economy will return to stronger growth eventually – it's whether they can make up all this lost ground in jobs and living standards,’ he said.

Balls added that the VAT cut would have ‘an immediate impact’ on household budgets, and had proved to be an ‘effective stimulus’ when Labour cut the rate from 17.5% to 15% in November 2008. It returned to 17.5% in January 2010, and was increased to 20% by Osborne in January this year.

Responding to the speech, Conservative Party deputy chair Michael Fallon said: ‘Ed Balls' Plan B of increased spending and unfunded tax cuts at a time when we have a similar deficit to Greece and Portugal looks like a plan for bankruptcy.

‘Our deficit reduction plan is backed by international organisations including the International Monetary Fund, the CBI, the Organisation for Economic Co-operation & Development and the Obama administration.’

Yesterday, Osborne said that the economy was ‘on the mend’. Making the annual chancellor’s ‘Mansion House speech’ at the City of London, he added that the recovery was ‘taking time’ due to ‘external shocks’ – the high oil price and the euro zone debt crisis.

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