From the TUC

VAT and the poorest

22 Jun 2010, by in Economics

The Budget increased Value Added Tax, which will hit the poorest hardest, and gave no promises about protecting the poorest families from the effects of this change. From 4 January, Value Added Tax will rise from 17.5 per cent to 20 per cent.

Value Added Tax is a regressive tax – it takes a higher proportion of poor people’s income than rich people’s. (And, as I’ve mentioned before, it’s one that the Conservatives have a penchant for raising.) The latest figures show that, in 2008/9:

  • Taxes accounted for 9.6 per cent of the gross income of the poorest fifth (“quintile”) of families,
  • 7.3 per cent of the gross income of the second poorest quintile,
  • 6.1 per cent for the middle quintile,
  • 5.7 per cent for the second richest quintile, and
  • 4.4 per cent for the richest quintile.

There’s a rather sneaky chart on page 68 of the Budget Report. This shows the percentage of net income that the increases in indirect taxes (mainly VAT) will take for each tenth of the population (“deciles”) and it seems to show that the changes are progressive, taking most from the richest and least from the poorest. But then you realise that the chart measures the proportion of people’s income that is taken, but with people ranked by expenditure distribution.

Now, poor people don’t get to save as much as rich people, so it isn’t surprising that VAT takes a much more equal share of the amount of money people spend. But, if that is what the Treasury wanted to measure, they really should have looked at the percentage of net expenditure the changes represented for each decile.

Most importantly, if we’re concerned about whether the change is fair to poor people it’s best to measure the impact on people with low incomes. The Budget Report doesn’t give a table for that, but I’ll bet a pound to a penny that the effect is regressive.

What is even more important is the fact that the Chancellor made no promises about protecting the living standards of people on benefits. VAT is going to increase from 17.5 per cent to 20 per cent – or by one-seventh. VAT accounts for a tenth of the gross income of people in the bottom decile, most of whom rely on benefits. To stop their living standards falling below an already unacceptably low level, their benefits should be increased to take account of this change – by about one seventh of one tenth, or one to one-and-a-half per cent.

Mr Osborne gave no hint that the government plans to do this. In fact, as I’ve mentioned elsewhere today, the government plans to switch to an uprating system that will make sure that benefit claimants receive even less of a boost each year. The more you look into it, the harder it is to accept the claims that this is a fair Budget.

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