The Grocer has been championing the need for a more sensible timetable to the return of VAT to prior rate levels later this year following the emergency measures the government announced to stimulate demand. From an outsider’s perspective Push Back the Tax! appears a common sense campaign that a business-sensitive government would listen to.
However, maybe there is a bigger debate to be had on the subject of VAT with the release of the July national debt figures this week, described by Shore Capital strategist Tim Morgan as “truly shocking”. July is usually a month when the taxman takes money in (£5bn was received in July 2008). This is no longer the case. In 2009 there has been an £8bn increase in borrowings as the corporate tax take contracts. The government forecasts £175bn of net borrowing this year, we look for £200bn. National debt interest costs could be circa £40bn per annum.
Britain’s national debt has mushroomed and needs to be brought under control. There are two ways to do this: a) increase taxes and b) cut expenditure. Little is likely to happen beyond current expectations in the near term, but we have a growing belief that following the next British general election more assertive action will be announced on both counts. We foresee the start of a public sector recession as the private sector returns to slow growth. We also see taxes going up.
And this brings us back to VAT. The opposition party has already started a debate about a potential increase in the rate of VAT, an increase that will do little for consumer demand when allied to limitations on personal allowances and benefits. For Asda, Sainsbury’s and Tesco, retailers with an already substantial presence in non-food but aspirations for considerably more share, higher VAT may put a damper on prevailing demand conditions.
However, what about an extension of VAT to areas that are not currently covered? Could, for example, it be proposed that VAT is extended to food to be prepared and eaten in the home? While not necessarily at the full rate (that would be highly unlikely) could the idea be put forward? Poverty campaigners and food policy makers should be alive to such a risk. Retailers and their trade associations may also like to seek clarification now from Labour or the Tories as to whether an extension of VAT on food is likely to be a possibility… or pie in the sky.
Dr Clive Black is head of research at Shore Capital Stockbrokers.