Well, they would say that, wouldn't they?

From City AM:

Borrowing was £1.5bn higher in April and May than at the same point last year, knocking the coalition’s plan to reduce the deficit by around £20bn. Spending in the first two months of this financial year was 4.1 per cent higher than the same time in 2010.(1)

Despite the over-spend, Labour last night blamed the UK’s anaemic growth on Osborne’s planned cuts. The deficit reduction "goes too far and too fast", a party spokesperson said,(2) arguing for a reversal of the VAT hike.(3)

The Federation of Small Businesses this week called on the government to temporarily slash VAT for the construction and tourism sectors, in a bid to kick start the economy.(4)

Yet Osborne’s policy of raising VAT while scheduling reductions in business tax was supported by Berenberg Bank economist Holger Schmieding(5): "Cutting business taxes is the strongest signal to send to global firms (6), while other supply side reforms will help boost the economy in the medium-term."

1) But both the big parties are doing plenty of Indian Bicycle Marketing. The Tories are allowing the deficit to increase while claiming that they are reducing it...

2) ... a delusion which Labour are keen to foster.

3) In which, unusually, Labour would be absolutely correct*.

4) As backed up by the FSB, who actually represent small businesses on the ground in the real economy - these people have to fill in their own tax returns and write cheques from their own bank accounts, and know full well that VAT is a tax on business and that they pay five times as much in VAT as they do in corporation tax or income tax on their profits.

5) Banks love the idea of VAT being increased and corporation tax reduced because they are largely exempt, for every extra £1 input VAT they suffer, they save £10 in corporation tax.

6) Banks are global, they can redirect transactions to whichever jurisdiction they choose; a local building firm or pub landlord can't just up sticks and relocate to a country where VAT on construction or catering is lower.

* Reducing VAT to 15% and curtailing exemptions for Business Rates were about the only two really good things they ever did. Along with exempting foreign dividends from UK corporation tax and the Substantial Shareholdings Exemption.

Treasury Tomfoolery

There's been an outbreak of common sense at the Federation of Small Businesses. From the BBC:

The FSB is urging VAT be cut to 5% in the construction and tourism sectors. "Consumer demand is a key barrier to economic growth so such a cut would encourage people to spend in these areas," the FSB said in its Voices of Small Business Report.

The FSB said: "Evidence from other EU countries shows that any lost revenue to the Exchequer by making VAT cuts will be met by earnings from additional demand, jobs and the wider economic activity."

Although the basic EU rule is that the standard rate of VAT has to be at least 15%, it appears that countries can reduce the rate on specific sectors, which is what Ireland seems to have done recently. So far so good. The depressing bit is right at the end of the article:

A Treasury spokesperson said: "Reduced VAT rates of the kind suggested would make a significant impact on revenue. Any claim that a boost to foreign tourism or construction would outweigh these effects would need to be looked at very carefully indeed."

In other words, they didn't give these secondary effects any thought whatsoever when they hiked VAT from 15% to 17.5% to 20%, did they? Even Ed Balls seems to have finally grasped that you cannot keep merrily increasing VAT and expecting overall tax receipts to keep going up, for crying out loud.

Two wrongs don't make a right

As I have explained many a time, the two worst taxes are VAT and Employer's National Insurance, because they damage the economy more than any other taxes, and subsidies for any specific industry or activity are bad for two reasons; they introduce yet more distortions (aka "picking losers") and they inevitably increase the tax burden on the non-subsidised sectors of the economy.

EU countries can't reduce their standard rate of VAT to lower than 15%, so the Germans and French have dressed up a VAT cut on domestically produced cars as a contribution towards the cost of scrapping the old car and replacing it with a new, slightly more energy efficient one, so it's all very green and lovely, despite being completely illegal under EU law (not that this ever stopped France before).

Employer's National Insurance on the other hand is entirely self-inflicted, there is nothing to stop the UK government increasing it or reducing it as much as it likes - and my magic fag packet says that the dynamic revenue fall of scrapping it entirely would be negligible. Seeing as it is cheaper to preserve a job than it is to create a new one, the emphasis right now should be on preserving what jobs there are, not trying to create new ones, so a cut in Employer's NI would be a quick win.

This point seems to be completely lost on the likes of the TUC and the Federation of Small Businesses - who have now called for a wage subsidy, i.e. they want to fund a subsidy for employment out of a tax thereon.

H/t Tim W.