Please, Mr Chancellor, why don't you . . .: VAT on fuel: This tax is just not fair

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The Independent Online
DURING his Budget Statement on 16 March, Norman Lamont announced that the Government would be imposing VAT on domestic fuel and power in two stages. The first stage would be on 1 April 1994, at a reduced rate of 8 per cent, rising to the standard rate of 17.5 per cent from 1 April 1995. He cited three reasons: first, to widen the VAT base; second, to raise additional revenue in the medium term; and third, to encourage energy conservation and contribute to the targets for reducing carbon emissions.

The estimates given at the time of Mr Lamont's Budget were that VAT would raise pounds 950m in 1994-5, pounds 2.3bn in 1995-6 and pounds 2.85bn in 1996-7. It is clearly a significant source of revenue. I believe, however, that it is a significant error of judgment that will dog the Government's fortunes for a long time.

First, the tax is regressive; people on lower incomes will pay a higher proportion of income in tax than those earning more. While this may be so of a whole range of goods and services, the unfairness is mitigated by the element of consumer discretion. In the case of food or domestic heating, it has until now been recognised that such a tax would bear disproportionately on lower income earners. Food and heating form a larger proportion of the total spending of poorer families. The concept of fairness in taxation is critical to the regard in which the Government is held. I can think of no tax measure in my 14 years in Parliament that has caused such concern, and concern to the Conservative Party both inside and outside the Commons.

It is important that in difficult times, government is seen to be fair. Without that perception, the task of government becomes even more difficult as the public responds either suspiciously or even negatively to the proper and reasonable government initiatives.

Many Conservatives have accepted the generality of the proposition that the burden of taxation should be shifted from incomes to consumption. But there has always been an understanding that the basic necessities of life should not form part of the tax base.

There is no discretion as to whether to purchase domestic heating or food, unlike the decision to purchase a magazine or newspaper. In fairness, the Government recognises this by accepting that additional resources should be directed to the most vulnerable. While this might assuage some of the anxieties of those on the lowest incomes, it will still leave large numbers just above the tax thresholds worse off. In addition, does not the concept of trying to mitigate regressiveness in taxation through the benefits system contradict the Government's aim of trying to simplify tax and benefits.

During the General Election, the Prime Minister cheered people like me with his restatement of the party's belief in our own Union, the United Kingdom. This tax will obviously fall more heavily on the colder areas of our nation, reinforcing a damaging impression that government and Whitehall feel little concern for the geographical disparities of the country. This is important to all highlanders, whether in Scotland or other cold areas. Does not such a tax offend against our regard for the well-being of all our citizens, wherever they may be?

I hope that our new Chancellor recognises how counterproductive this unfair tax is to the interest of social harmony and to the interests of the Government and the party. If his judgement is that the revenue it would raise is necessary, then income tax is the fairest way for us all to contribute proportionately to government expenditure. A recognition of how unfair the tax is could assist in the return of the Government to public esteem.

Richard Shepherd MP for Aldridge Brownhills (Cons).