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George Osborne will today claim in an emergency Commons debate that an aborted plan to increase VAT to 18.5% showed that ministers want to drop a secret "tax bombshell" on middle Britain.
Hours after securing the first ever emergency debate on a pre-budget report, the shadow chancellor last night seized on the disclosure of the planned VAT increase to claim that the government was hiding a £100bn black hole in its tax plans.
Government sources admitted last night that the VAT increase, which would have been introduced in 2011, was included in its plans for the pre-budget report until the final stages. It was withdrawn from a Treasury document, which was inadvertently placed on the internet, on Friday.
But Osborne will say today that the increase was withdrawn at the last moment because ministers took fright that the first rise in VAT in more than a decade would shock voters.
To back up his claims, Osborne will say that the planned VAT increase helps to explain a £100bn black hole he identified in the government's calculations on Monday. In its main booklet accompanying the pre-budget report, the government claimed that tax receipts would start rising by 4% a year after 2011 - more than the 2.8% forecast in the spring budget when the economic outlook was less bleak. This left a £100bn hole, half of which would be filled by the proposed VAT rise, according to the Tories.
One senior Tory said: "We believe this document was changed over the weekend. But it was too late to change the book which accompanies the PBR. That explains the discrepancy. The VAT rise was how the Treasury intended to fill half of the black hole."
Osborne is delighted by the disclosure of the VAT increase, which he will use to claim that the government's response to the recession is unravelling. He will point to an analysis of three of the government's key fiscal plans by the Institute for Fiscal Studies, which says that:
· The 2.5% cut in VAT, one of the main elements of the government's fiscal stimulus to kick-start the economy, will apply to less than half of consumer spending because 55% of goods are subject to full VAT rate, and alcohol and tobacco are exempt from the plan.
· The new 45% rate of income tax, which will apply to people earning over £150,000, will raise "approximately nothing", the IFS said, because people will emigrate or disguise their income as capital gains.
· The half-point increase in national insurance contributions will leave people earning more than £20,000 worse off when this is introduced in 2011. The IFS offered only a partial endorsement of the Tories in this area, but Osborne said: "Now it is clear that millions of people on modest incomes in middle Britain will be hit by Labour's permanent tax rises."
The shadow chancellor, who has faced criticism on the Tory right for failing to deliver a coherent response to the recession, believes the PBR marks a seminal moment in what he hopes will be the decline of Labour. He hopes it will mark the moment voters decide the economy has moved from a global financial crisis, where Gordon Brown has performed well, to a full-blown domestic recession that will lead to job losses and tax rises to pay for record government borrowing.
The Tories yesterday attempted to answer Labour criticism that Osborne has no plan for the economy. They highlighted three main elements to their strategy:
• Every member of the shadow cabinet has been asked to identify savings in the departments they hope to run.
• More cuts in interest rates will follow.
• And more pressure will be put on banks to increase lending, with a proposal that the government should be prepared to insure bank loans.
- Tax and spending
- George Osborne
- Conservatives
- Economic policy
- Credit crunch
- Economics
- Alistair Darling
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