UK Politics

Ed Balls urges emergency tax cut to boost economy

Media captionBalls: "George Osborne has got to stop trying to score cheap points by blaming Labour"

Shadow chancellor Ed Balls has called for a temporary emergency cut in VAT to boost consumer confidence and "jump-start" the economy.

In a major speech outlining Labour's economic policy, he said acting now to counter the slowdown was a better option than just "hoping for the best".

He said cutting VAT would have "an immediate impact" on household budgets.

Prime Minister David Cameron said "slashing taxes" would only make the UK's fiscal deficit worse.

The previous Labour government temporarily cut VAT - a tax on most goods and services - from 17.5% to 15% in December 2008 in an attempt to boost consumer spending.

In opposition, the Conservatives dismissed the 13-month measure as "an expensive failure", and in his first Budget, Chancellor George Osborne announced that VAT would rise to 20% to help raise money for the Treasury and tackle the UK deficit.

Mr Osborne has made it clear he has no plans to lower the rate again, describing the rise to 20% as a "structural" change to the country's tax system.

'Consumers squeezed'

In his first substantial policy speech since becoming shadow chancellor earlier this year, Mr Balls told the London School of Economics that Labour's VAT cut helped to boost growth and resulted in the deficit "coming in £21bn lower than expected".

He said that by reversing the rise now, Mr Osborne would help individuals struggling with rising prices and businesses experiencing flagging demand, as well as helping to drive down inflation.

"He's got to choose the measure that has the quickest impact. The thing about VAT is, he can reverse [the rise]... by the end of the day.

"It has an immediate impact on people's purchasing powers or the bottom line of businesses.

"The argument against is sometimes people don't see it. The point is, whether you notice it or not, at the end of your shopping trip there is more money in your pocket because of the VAT cut which you then have an immediate decision about how to spend.

"Even if companies didn't pass it all on, it's there in their bottom line - they can make a decision then about what other prices they cut or jobs [they create]."

Mr Balls did not elaborate on how he would pay for the VAT cut, but said that as well as helping individual consumers, it would ultimately contribute to deficit reduction by giving the economy a "jump start".

"The question is not the cost to George Osborne of paying for this temporary emergency tax cut, but the price our country will pay if he carries on regardless."

'Political gamble'

The shadow chancellor criticised Mr Osborne's refusal to consider changing course on the economy.

"When I hear George Osborne refuse even to countenance a Plan B, I do not believe this is economic judgment at work, but a political gamble with the nation's economy from a chancellor shaping his policies not around constitutional responsibility, sound economics and the protection of jobs, growth and homes, but around a fixed political strategy to win an election in 2015."

He said that as well as a VAT cut, his own "Plan B" would include repeating a one-off tax on bankers' bonuses in order to raise £2bn.

He argued that £1.2bn of that should go to fund the construction of 25,000 new homes - a programme he said would generate 20,000 jobs directly and many more in related industries.

Some £600m from the levy should to a youth jobs funds and the remaining £200m to boost regional growth, he added.

Mr Balls' speech came as figures showed that UK retail sales fell sharply in May - by 1.4% - more than reversing the 1.1% rise in April.

The Office for National Statistics said the result - which was well below analysts' forecasts - was driven by the biggest monthly decline in sales by food retailers since June 2008.

Speaking at a public question and answer session in Lincoln on Thursday, the prime minister said: "Those who say well, 'You ought to go out and slash taxes, spend some more money or do some more government investment,' all you would be doing if you did that is making the problem of your deficit - your overdraft - worse."

Mr Balls' intervention comes a day after Mr Osborne said the UK economy was "on the mend" in his annual Mansion House speech but the recovery would take time.

In its recent analysis of the UK economy, the International Monetary Fund said it expected weak growth and rising inflation to be "largely temporary" and suggested the coalition was right to proceed with its deficit reduction plan.

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