Tax cut priority should be to 'reverse VAT hike'

Shadow chancellor Ed Balls today said the priority for tax cuts should be reversing the hike in VAT to 20%, as it was reported that a proposed increase in personal allowances could be brought forward.

A Downing Street aide told the Daily Express that the need to boost the economy meant there was "a serious case for accelerating" the introduction of the policy, which the newspaper said would be worth up to £400 a year for low and middle-income earners.

But Mr Balls told BBC Breakfast: "If you really want to get spending and purchasing power into the economy quickly, rather than doing it through personal allowances, which tends to be a bit diffuse, better to have a temporary cut in VAT because a cut in VAT puts money into people's pockets straight away. It will have more of an impact upon the economy.

"But to be honest, if he was to do personal allowances rather than VAT it would be such a change of direction."

Yesterday a group of leading economists called on Chancellor George Osborne to scrap the 50p tax rate it at the earliest opportunity.

In a letter to the Financial Times, 20 high-profile business experts told the Chancellor the UK needed to return to an "internationally competitive tax regime" to stimulate the stuttering economy.

But Government figures poured cold water on prospects of swift action on the 50p rate, with Communities Secretary Eric Pickles - a leading Cabinet advocate of abolition - acknowledging that it can be dropped only "when the time is right".

Mr Pickles told BBC Radio 4's World at One: "There is a strong case to say this isn't actually contributing very much and on balance is probably doing more damage than good.

"When the Chancellor judges the time is right to do so, then we should get rid of it."

But in an interview on BBC Breakfast today Mr Balls said: "Do you really think the right priority now is to only cut taxes for people whose incomes are over £150,000 a year? That is a tiny minority of people.

"I actually think it would be much better to do something which helps everybody at the moment.

"That is why a VAT cut would make much more sense right now."

Signed by economists including former members of the Bank of England's Monetary Policy Committee DeAnne Julius and Sushil Wadhwani, the letter warned that the levy on earnings over £150,000, introduced by the previous Labour chancellor Alistair Darling, "punishes" entrepreneurship and could do "lasting damage" to the economy.

The top rate, predicted to raise around £2.7 billion, was a "self-defeating" way for the Treasury to raise cash as it would drive investment and high-earning individuals abroad, they said.

Mr Osborne has ordered HM Revenue and Customs to carry out a review of how much money the 50p rate is actually raising, though the results of this are not expected until the spring.

Mr Cameron's official spokesman confirmed that the Government regarded the rate as "temporary" but stated that official policy - as set out in last year's Coalition Agreement - was that lifting the income tax threshold to £10,000 should take priority over other tax cuts.

The spokesman told reporters: "As the Chancellor said at the time of the Budget, the 50p rate is a temporary measure.

"He has asked Revenue and Customs to conduct some analysis on the amount of money being raised by the 50p rate. That analysis is still ongoing."

PA