VAT’s the way to do it

DEPENDING on your political perspective, the Coalition is either correct in its determination to see out its austerity programme, or it is time to put plan B into

From my vantage at least, the pressure does appear to be mounting on the Chancellor to loosen the purse-strings.
The latest figures on UK economic output raised the prospect of the country slipping into recession for the third time in four years, leading to calls for the government to take steps to get the economy moving again. Measures mooted by commentators include bringing forward capital investment projects to create jobs, and cutting VAT to get consumers and businesses spending again.
Calls are also growing in the trade for George Osborne to cut VAT for the hospitality sector, as outlined by veteran French trade lobbyist Jacques Borel in this issue (page 6).
Borel was a key voice behind the vote by the EU back in 2004 to allow member states to vary the rate of VAT for hotels, bars and restaurants.
As Borel claims, those states which took up the option, most notably France, have reaped the benefits.
Since slashing VAT from 19.6% to 5.5% in 2009, the French hospitality trade has been on the up. The lower VAT rate is said to have allowed operators to set lower prices for rooms, meals and drinks, bringing more people into venues. The additional revenue generated, in turn, has been used to pay for salaries and investment in key areas like staff training and premises improvements.
And because more people are in jobs, more are paying tax and businesses are more profitable, the public pursue will be better off in the long run. Or so the argument goes.
Borel has begun the process of convincing the UK Treasury to make a similar move and insists time is of the essence. He told SLTN that if the government acts now it will deliver a timely boost for the Coalition ahead of the 2015 general election, when he said it will be badly in need of good news on the economic front.
His arguments are gaining increasing favour in the trade. Major operators including Wetherspoon, Pizza Hut, Punch Taverns and Heineken have signed up to Borel’s VAT Club, and the British Hospitality Association is actively campaigning on the issue, arguing that lower VAT will make the UK more competitive from a tourism perspective.
But I do wonder if the time is right. Borel points out that the £7.8 billion the Treasury will initially lose from lower VAT takings (on the basis of a cut from 20% to 5%) will eventually be offset and then overtaken by the gains in things like income and corporation tax outlined above.
He predicts that if the measure is included in the 2014 Budget, a positive effect on jobs will already be seen by the time the country goes to the polls in 2015.
But while the prospect of a tax cut on business may appeal to traditional Tories, I do wonder if the perceived benefits are too distant for them in election terms.
Politicians are primarily motivated about staying in or gaining power, and as such are often seen to act with the short-term in mind, as opposed to displaying long-term vision. There is also little recent evidence of government in this country paying much attention to the trade, as evidenced by the continuing ignorance of the failed drinks duty escalator. I do hope I’m wrong, though.