Sunday, May 16, 2010

VAT should be imposed on food and children's clothes, says IMF

By By Edmund Conway, Economics Editor
Published: 9:30AM BST 15 May 2010

David Cameron should use this summer's emergency Budget to raise VAT on a host of excluded products, including food and children's clothes, the International Monetary Fund signalled yesterday.

In an unusual intervention, the IMF said one of the best ways for the coalition Government to raise money and repair the public finances would be to remove the zero-rate that excluded a number of goods from VAT.

The recommendation came amid suspicion that the Government would also have to raise the level of the sales tax from 17.5 per cent to 20 per cent if it was to afford the tax pledges it made in its agreement earlier this week.

Although the IMF's suggestion, published in a comprehensive survey of public finances around the world, was less eye-catching than raising the headline rate, it would potentially have a greater impact on the price of goods, and on families' living standards.

The document, signed by Dominique Strauss-Kahn, the IMF's managing director, said: "There is substantial scope for improving the revenue performance of the VAT in almost all countries, including by eliminating exemptions and reduced rates."

VAT is not charged by HM Revenue and Customs on certain items, including food, children's clothes, domestic passenger transport, books and prescription drugs.

The IMF said Britain could raise 3.3 per cent of its economic output – about £50 billion a year – merely by halving the number of exemptions.

It added that despite having among the highest levels of petrol duty in the Western world, Britain could afford to increase fuel taxes slightly more, raising a further £3 billion.

The suggestions were likely to fuel suspicion that George Osborne, the Chancellor, would raise a series of taxes, including VAT, at the emergency Budget, which is due to take place within 50 days.

City commentators, including Robert Chote, the head of the Institute for Fiscal Studies, and 24 of the 28 economists regularly surveyed by the Treasury, pinpointed the sales tax as the most likely candidate to rise in the Budget.

However, few suggested that the Treasury should lift the exemptions, which also included financial services fees. Some warned that increasing VAT on zero-rated items would affect the finances of lower income families in particular.

The IFS calculated in its Green Budget earlier this year that such a move – even at a more limited level, raising only £24 billion – would account for about 7 per cent of the income among low-paid workers.

The increases may be necessary if Britain was to start reducing its deficit, the IMF said.

It pointed out that, over the next few years, Britain would need to reduce its deficit by 9 per cent of gross domestic product – equivalent to £130 billion.

The Government has yet to specify how fast it intended to cut the deficit, although it pledged to cut spending by more than it raised taxes.

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