Cut VAT, not top tax rate, Labour urges Tories

Labour last night called on George Osborne to consider a temporary VAT cut to stimulate the economy – rather than scrapping the 50p tax rate.

The Independent revealed yesterday that the Chancellor and Prime Minister are discussing plans to cut the 50p rate of income tax to 45p after being told that it is generating only marginal returns for the Exchequer.

The two also believe that the 50p tax band is sending out a damaging message to "wealth generators", particularly from abroad, whose investment and spending power is vital for economic recovery.

Angela Eagle, shadow Chief Secretary to the Treasury, said that a VAT cut would be a far more reliable – if more expensive – way of stimulating the economy. "The key thing is that we have seen our economy flat-lining in the last nine months and we can't deal with our deficits without a plan for growth," she said. "That might mean, for example, kick-starting our economy with a temporary VAT cut, a much better idea I think than talking about giving a tax cut to those who are very well off and earn over £150,000 a year, which is what the Government seems to have been leaking to the media this morning."

Vince Cable, the Business Secretary, stressed that were income tax to be cut it would need to be compensated for by another tax on the rich: "I and my Liberal Democrat colleagues have always made it clear that if there is scope for cutting taxes, and there isn't a great deal of scope at the moment, the priority is cutting taxes for people on low and middle incomes.

"In addition, if we are going to relieve taxes on the very wealthy, we've got to find some other mechanism, perhaps looking at wealth or higher value property, which is comparable and meets the economic requirements of the country as well as our requirements for fairness."

Justine Greening, Economic Secretary to the Treasury, said that the Tories do not regard the rate as being permanent. "I think we've always been very clear cut; ultimately we see that as something temporary. At the end of the day, it's above my pay grade to talk about what the Chancellor may or may not do in the Budget."