Ed Davey: Cut VAT from 20% to 17.5% as an emergency measure

At 2.15pm on Sunday Conference will be debating a motion F30 Tackling the cost of living crisis.

A swathe of proposals are being recommended, including scrapping the rise in NI, ending the freeze on Income Tax personal allowance, uprating pensions and reinstating the £1000 boost to Universal Credit amongst others. These are in addition to policies that have already been agreed such insulating homes, and taxing income from capital more fairly. Three amendments, which add (or remove) options, will also be discussed.

Ed Davey has today added to the mix by calling on the Chancellor to take the radical step on cutting VAT from 20% to 17.5% for one year. This would save families £600 on average. It would also boost the economy by shoring up consumer spending, supporting local high streets and keeping inflation lower than it might have been.

It would also be simple to introduce and would not require primary legislation.

Ed says:

This is crunch time for the Conservatives and the Chancellor. Their cost of living crisis is hitting families hard and it is about to get worse. Will Rishi Sunak act or will he let families up and down the country suffer more financial pain?

An emergency cut to VAT is desperately needed for the millions of people around the country worried about making ends meet. High street businesses that fear going to the wall would receive critical support, as people who are feeling the pinch spend more at their local shops, cafes and restaurants.

This is a once-in-a-generation crisis, and the government must step up to help struggling households and businesses on the brink. Instead of clobbering struggling families with a tax hike, the Chancellor should be putting money back into their pockets.

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35 Comments

  • I’m truly very sorry, but if the Liberal Democrats are to make any progress at all in winning the affection and respect of the electorate they need fresh clear consistent and radical leadership.

    This is very difficult given many of us still remember 2010 when Sir Edward was in Government as Under Secretary of State in the Department for Business, Innovation and Skills with responsibility for Employment Relations, Consumer and Postal Affairs. As such, he voted to increase VAT form 17.5% to 20% which, presumably cost ” families (the equivalent of) £600 on average”.

  • Jenny Barnes 11th Mar '22 - 10:45am

    Cut national speed limits to 55mph as an emergency measure. Fuel consumption drops by nearly half from 70mph, more from 80, as many people go that fast on M-ways.

  • I think we should be pushing for an emergency Universal Basic Income.

    With everything going up from Petrol to heating to food etc, this is unsustainable.

    Businesses are going to be asking for further bailouts from the Government due to rising fuel costs from pubs and brewers to airlines and producers and I just don’t see how the government can come to every business rescue and some are going to have to fail, more than likely those in the pub / rest industry who were hard hit from covid.

    People are going to have to revaluate their spending priorities as the cost of living rises and entertainment is going to be one of the first to go, resulting in many job losses.

    I think now more than ever with these uncertain times, we need a generous UBI now

    Even if the war in Ukraine ended in the next couple of weeks ( which I doubt) the financial effects and the food crisis and rising cost of living is going to last for much much longer.

  • Nonconformistradical 11th Mar '22 - 11:29am

    I agree with Jenny about the speed limit. If I recall it was cut to 50 mph during the 1973 oil crisis.

    And we might all be a bit safer on the roads as well!

  • Sadly the most dangerous drivers on the road have no care for speed limits or other restrictions that are there to make driving safer, other countries have already reduced the tax on fuel to help during this present emergency, it would be sensible if our government did the same as, whether we like it or not, the cost of fuel has an affect on the cost on so many products and services.

  • Jenny Barnes 11th Mar '22 - 1:49pm

    The cheap fuel campaign has already had something like £20 Bn in foregone tax. Yes, fuel is a cost component of many things, but the poorest in society won’t have a car in the first place- so reducing tax here is regressive. UBI would be good.

    And take the speeders’ licences away.

  • Nonconformistradical 11th Mar '22 - 2:10pm

    “And take the speeders’ licences away.”
    For a very long time

    And take their cars away as well.

    Reducing the speed limit (needs proper publicity) doesn’t only benefit people in reduced fuel costs – it is one of the steps we should be taking to address climate change – greater distance travelled per litre should result in reduced greenhouse gas emissions.

  • Barry Lofty 11th Mar '22 - 2:16pm

    Whether UBI happens in future or not it is not going to help in the present situation and although it is true that the poorest in society would not have a car, surely they would also be badly affected by the increased living costs caused by these extraordinary fuel rises?

  • The problem with cutting VAT is, it does not necessarily translate in a lower cost to the consumer as the retailer does not always pass the cut on.

    Look at when petrol prices increased last time due to panic at the pumps and the warnings of fuel shortages. Retailers hiked their prices and even when the problem was rectified and fuel supplies returned to normal, they never lowered the prices again.

    This is not like the pandemic when it was about supporting businesses to retain staff and stay afloat due to being forced to close.

    Now the money needs to go directly into the people’s pockets via a UBI in order to give them disposable income to spend in the economy.

    There is no point in subsidising businesses to stay afloat due to rising energy and commodity costs, if the consumer still does not have enough money to purchase the products.

    We need to be making the argument for UBI more than ever now

  • Nonconformistradical 11th Mar '22 - 2:43pm

    “although it is true that the poorest in society would not have a car…”

    If they do have one (or maybe a small van) it’s likely to be a scruffy very old highly inefficient vehicle staggering to its next MOT

  • Lorenzo Cherin 11th Mar '22 - 4:11pm

    A measure way to meek!

    Abolish VAT on the buying of energy!

    Agree with Jenny, Matt, cut speed limit, introduce basic income. It need not be universal, it could stop at earners above fifty thousand.

    We need radical ideas, but its about dignity and sufficiency more than equality.

    It is absurd the energy consumption of the rich in big homes, many cars, which they can pay for easily, is paid for buy the poorest in a way that is making them destitute.

    See whether you could live on eighty quid a week when that is the price of energy, utilities, etc alone!

    Sunak is a joke. But Labour have never favoured a basic income or much incresing of benefits.

  • Brad Barrows 11th Mar '22 - 4:32pm

    Cutting VAT gives more tax cuts to those who spend more…in other words, wealthier people, who spend more than people on low wages or benefits, get more benefit. Is that really what Ed wants? A better approach would be to remove the current 5% VAT charged on fuel and energy along with increases in Child Benefit.

  • Nonconformistradical 11th Mar '22 - 4:45pm

    An even better approach would be to get on with getting many more homes properly insulated – save costs by not using so much energy.

    https://www.bbc.co.uk/news/uk-england-devon-60706439
    “About 300 council houses in Exeter have received solar panels and insulation as part of a council’s net zero aim.

    The additions are being installed as part of a £2.4m project to help tenants save money and tackle climate change.

    It is being jointly funded by the government and Exeter City Council, and aims to change 4,000 local authority homes by 2030.

    One resident said the insulation had made a “big difference” to her.

    The project, known as retrofitting, will see council houses receive improved insulation, solar panels, upgraded central heating systems and better ventilation.”

  • Peter Watson 11th Mar '22 - 4:57pm

    @Brad Barrows “wealthier people, who spend more than people on low wages or benefits, get more benefit. Is that really what Ed wants?”
    Given that the former are more likely to be Lib Dem voters or targets than the latter, then the answer might well be yes! 🙁

  • @Nonconform

    But that does not help people now.

    The cost of living is sky-rocketing by the week and is set to get worse.

    Petrol Prices rise daily, the cost of heating oil more than doubled over the course of a week.
    The cost of electricity and gas has already gone through roof and the effects after April is going to cripple the most vulnerable and those just about managing.

    Staple food prices are about to get even more expensive which will hit the most well off again.

    No doubt we are going to see another crisis with Co2 shortages as well very shortly.

    We are on a downward slippery slope with a chancellor who has got his fingers in his ears hoping it will all go away

    Pumping Billions into keeping businesses afloat is not going to work this time around.
    The Problem is going to be the ordinary citizen on the ground not having the
    disposable income available to them to spend in the economy.

  • If your pension, wage, salary or benefit is being swallowed up by energy and rising food costs, then something else has to give, eating out, going to the pub, going to the gym, buying a book (whatever)
    It is going to be no good businesses screaming for a bailout, if the consumer still does not have the funds to purchase due to inflation and rising costs of the basics in life.

    The Bailout this time needs to come to the people directly, in order for them to be able to continue to spend in the economy.

  • Barry Lofty 11th Mar '22 - 5:24pm

    On a perhaps a too personal point of view, I recently had a significant birthday on which the Works and Pensions Dept rewarded me with a 25p a week increase in my pension, just a couple of weeks after MPs awarded themselves a not insubstantial increase in their remuneration, my point being can you really believe this government would consider a UBI scheme in the short term, unless Boris Johnson suddenly sees the light and it benefits his personal ratings to do it?

  • Lorenzo Cherin 11th Mar '22 - 5:34pm

    Yes Matt!

    Immediately abolish VAT on fuel.

    Immediately give every individual one hundred and twenty five pounds a week if on earnings under a certain amount, perhaps, thirty to fifty thousand.

    Immediately abolish the Job Centres as they are now, redeploy best staff only in govt jobs to help people.

    Abolish Green levies that the energy giants pass to consumers. Bring in a windfall tax on them.

    Make profit levels not acceptable in energy. Effectively, cap prices the cap lower than ever, not higher. Any company who goes into this area should know the old days of that kind of profit is over!

    Have a consumption ration card for flying. Fly more than the basic and necessary, ie too often, you pay more in tax. Show you have family to visit, get a discount. If a holiday, you get to pay extra tax!

    Bring in a wealth tax on incomes over a million a year, savings over ten million or above. Increase to rate to fifty per cent too. On incomes over a hundred thousand.

    Cap all rents to inflation.

    Slash waste, advisers, chumocracy!

    And also….

  • Nonconformistradical 11th Mar '22 - 5:35pm

    @Matt
    “@Nonconform

    But that does not help people now.”

    If that referred to my point about insulating homes – there are some things which could be done farily quickly which won’t solve the whole problem but on a Community/DIY basis could achieve much – loft insulation and draft-proofing.

  • @Barry

    To be fair, I cannot see any Tory doing it, but that does not mean that our parliamentary party should not be asking for it and trying to get Labour on side also.

    Everyone knows that a cost of living crisis like nothing is seen in a generation, is coming and there is very little that can be done to stop that now. Even if the war in Ukraine was to stop tomorrow, the financial effects are going to be felt far longer.

    The Majority of the public might have been against UBI and the same old arguments “money for nothing culture” being used, but this will surely change when those very people start to see just how much their own pay packet is about to be decimated by rising prices and destroying their living standards.
    There are not many families out there who can afford to absorb doubling energy prices, let alone rising costs in staples.

    So now is the best time to be making those arguments for a UBI, as it won’t be too long before those who object now, will be welcoming the additional support.

    And if the Tories are forced into giving direct financial support to the people, rather than to the business, we should be getting the credit for it, for it being our policy, rather than the Tories jumping on the bandwagon at the last available moment

  • Barry Lofty 11th Mar '22 - 5:47pm

    @Matt, well argued, not much I can disagree with in your comments, it is going to be a difficult time for many people and I am not trying to make light of that, perhaps I am getting more and more cynical with my advancing years, perish the thought.

  • Jenny Barnes 11th Mar ’22 – 10:45am:
    Cut national speed limits to 55mph as an emergency measure. Fuel consumption drops by nearly half from 70mph, more from 80,…

    For a typical small petrol car reducing speed from 75mph to 50mph would reduce fuel consumption by around 15%. For a larger engined car by around 10% and less for a modern design with a low-drag coefficient (flush glass and door handles, long tapered roofline, recessed wipers, etc).

    One (theoretical) way to halve car fuel consumption would be to dramatically increase average urban driving speeds by, for example, more working from home, minimising school runs, removing speed humps and other obstacles, raising 20 and 30mph speed limits, etc. …

    ‘Optimal Car Average Speed For Minimum Fuel Consumption’:
    https://myengineeringworld.net/2012/05/optimal-speed-for-minimum-fuel.html

    The chart above depicts the relationship between the fuel consumption and the average speed of a typical small gasoline (< 1400 cm³) Euro 4 passenger car.

    Nonconformistradical 11th Mar ’22 – 11:29am:
    If I recall it was cut to 50 mph during the 1973 oil crisis.

    At the time, most cars were about as aerodynamic as a coal scuttle. Even so, the national speed limit was likely a piece of political theatre (‘something must be done’; here’s something) rather then having any meaningful effect (apart from reducing productivity).

  • Something seriously wrong here.

    For it to be correct to say that a cut in standard rate VAT from 20% to 17.5% for one year will save families £600 on average requires that the average family spends £29,000 a year on standard VAT-able items.

    Just to be clear, that’s excluding spending on (most) food, public transport, rent, mortgage costs, childrens clothes, healthcare, education, books and magazines, water rates and home gas and electricity (home energy being subject to 5% rather than 20% VAT.

    I simply don’t believe that the average family spends £29,000 a year on “the rest”

    (The maths is as follows: £29,000 of standard-rated spending includes VAT of £29,000 x 20/120 = £4,833. If VAT is cut by 2.5% from 20% to 17.5%, it saves 2.5%/20% x £4,833 = £604)

  • Chris Moore 11th Mar '22 - 9:51pm

    UBI is immensely costly. It has to be paid for with tax hikes across the board.

    It’s not focused enough. Redistribute to the those at the bottom, not those in the middle and above. It’s self-defeating. Middle earner: get UBI; and it’s clawed back in taxes on everything.

    Many posters on here are being sensational with spending ideas, but less than convincing in how the splurge is all going to be paid for.

    Intense inflationary pressures mean it’s not a great moment for such expansiveness. People on fixed incomes – pensioners, receivers of benefits – suffer in times like these.

    We should simply be giving increases in existing state benefits to at least match inflation. This would target extra cash on the most poorly off.

  • @Chris Moore

    Businesses are going to be screaming for bailouts again which the Tories will feel more inclined to support, however, experience tells us that this support never filters its way down to the consumer.
    During the pandemic, how many businesses received support by means of furlough, cancelled business rates etc and yet how many businesses still hiked their prices to the consumer?

    This cost of living crisis is going to be very different and need a very different approach to bailing out the businesses directly in my opinion, because the problem is going to be disposable incomes for the consumer.

    Welfare rates have already been set for 2022/23 and the new increase for 2023 will not be set until September 2022 depending on what inflation is at that time.
    That is not going to help people over the next 12 months and even then if inflation was at 10% in September, come April 2023
    £7.40 a week increase is not going to help people on JSA or ESA or £14 a week for someone on basic state pension When energy costs and staple items have far exceeded this in the current climate.

    But I dont want to concentrate on just those receiving state support as there are millions of just about managing families, who also are unable to offset these mad price rises.

    It requires thinking out of the box, these are not normal times

  • James Fowler 11th Mar '22 - 10:22pm

    There’s just no way around this, the net result of the war in the Ukraine is that real incomes will fall. Austerity, Brexit and Lockdown have made us a lot poorer already, so it’s really going to hurt.

    There are ways in which the impact for the poorest could, and should, be ameliorated – the most straightforward being a rise in benefits and pay. Cutting taxes isn’t realistic given the accumulated Financial Crisis/Lockdown bill, but neither is raising them sensible either. The simple truth is that, in the words of David Cameron, ‘Britain needs a pay rise’.

  • Jeff 11th Mar ’22 – 6:35pm
    One (theoretical) way to halve car fuel consumption would be …, more working from home, minimising school runs, …”

    I’m a little surprised it has taken so many comments before someone has stated the obvious. The big challenge we really have is rapidly massively reducing our usage of imported fossil fuels, during lockdown we saw massive reductions in fuel consumption, with many businesses and schools adopting working/studying from home. Additionally, shops, cafes and restaurants local to where people actually lived saw increased business.
    Thus the simplest approach is to effectively bring back some aspects of lockdown (without the quarantine requirements), giving additional impedus to these changes in our society and economy.

    So rather than demand reductions in VAT which as others have noted only really benefit a small minority and will only go so far and we can reasonably expect matters to get a lot worse (war is still on the table), we should be use the increasing prices to drive through real structural change that benefits the majority and takes us further down the road towards achieving our sustainability and climate change targets and increases our chances of surviving.

  • Chris Moore 12th Mar '22 - 7:53am

    Hi Matt, I agree with your description of the dire difficulties faced by the poorer off in society.

    Receipt of benefits is critical as a marker of economic suffering, whatever its cause. Yes, you’re right about the time lag factor when inflation is significant as currently. There are ways round this: base benefit increases on forecast inflation, if this is higher than current inflation. And commit to making up any shortfall.

    Carers, as we’ve discussed before, need and deserve well above inflation increases in their allowance.

    As to poor families and individuals who aren’t on benefits, but are really struggling, could I suggest a negative income tax for those below an income threshold would be much better targeted than a UBI?

  • Peter Watson 12th Mar '22 - 10:31am

    @Simon Shaw ‘I simply don’t believe that the average family spends £29,000 a year on “the rest”‘
    I agree that £600 sounds like a dodgy figure.
    I can see where it might have come from: the OBR reports, “In 2019-20 VAT raised £134 billion … and was equivalent to around £4,700 per household and 6.0 per cent of national income.” (https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/vat/). One eighth of that (2.5/20) is £587.50, i.e. c.£600.
    For comparison of this notional average household spend of £29000 on standard rated items, apparently in 2020, the median household income was £30800 and the mean was £37100 (https://www.gosimpletax.com/insights/household-income-statistics-uk).
    It does seem to emphasise Brad Barrows concern earlier in this thread that this is targeted to benefit “those who spend more…in other words, wealthier people”.

  • David Garlick 12th Mar '22 - 12:49pm

    @David Raw
    That time was after the Finacial crisis when all eyes were on ‘saving’ the selfish bankers without whom it was suggested that the ‘world would come crashing down’. Hindsight is a wonderful thing and you seem to have clear sight of what we could have done better?

  • Phil Beesley 12th Mar '22 - 1:31pm

    Jeff: “At the time, most cars were about as aerodynamic as a coal scuttle. Even so, the national speed limit was likely a piece of political theatre (‘something must be done’; here’s something) rather then having any meaningful effect (apart from reducing productivity).”

    At the time of the 1973 oil crisis, 95% of UK cars had a four speed gear box and an engine delivering optimal brake specific fuel consumption (fuel rate used to generate useful power) at about 50 mph in fourth gear. A top speed of 50 mph reduced fuel usage.

    Today we have multispeed gearboxes, incredible automatic transmissions, and clever ignition and valve control systems in engines. Funnily enough 50 to 55 mph in fourth gear is a very efficient way to drive — putting the car into fifth gear may reduce engine noise but may make the engine less efficient.

    Your car handbook may have some useful but hideously obscure tips on how to drive it.

    The torque curve beloved by petrol heads defines when an engine is most useful — peak torque is when an engine generates the most power using the least fuel (lowest brake specific fuel consumption). You should drive in the engine rev range around peak torque.

    Modern car aerodynamics? Drag has improved significantly but fat modern cars present 40% more surface area.

  • Peter Watson 12th Mar '22 - 5:14pm

    @David Garlick “Hindsight is a wonderful thing and you seem to have clear sight of what we could have done better?”
    I seem to recall that before the 2010 election, with foresight, Lib Dems warned against a Tory VAT bombshell.

  • Why is nobody mentioning the cost of Brexit? Get freedom of movement and free trade and stop being so stupid.

  • @David Garlick – That time was after the Finacial crisis when all eyes were on ‘saving’ the selfish bankers…

    I didn’t really get why the money had to go directly to the bankers – who manufactured the crisis. To me it was obvious, the problem was default levels on sub-prime mortgages, so government needed only to guarantee such mortgages. It is quite telling that lockdown and all its government handouts has cost the UK government less both in pure numbers and in real-terms than the 2009~10 Quantative Easing.

  • Siv White 12th Mar ’22 – 10:13pm:
    Why is nobody mentioning the cost of Brexit?

    Good news! Our ‘divorce’ payments to the EU are set to fall dramatically as shown by the barchart in this article…

    ‘Thanks to Brexit, UK will not pay over £18bn towards EU’s huge new 2022 budget’:
    https://facts4eu.org/news/2021_nov_eu_sidestep

    Get freedom of movement…

    The UK can issue work visas to anyone from anywhere on whatever terms we see fit. The uncontrolled ‘free movement’ that was imposed on us by the EU ‘single market’ was highly asymmetric. It resulted in many wages being suppressed and pushed up the cost of housing.

    …and free trade and stop being so stupid.

    The UK now does more free trade than ever. We have the world’s most comprehensive free trade agreement with the EU giving us 100% tariff and quota free access, we’ve rolled over 97% of the EU’s trade deals, we’ve recently signed ‘gold standard’ agreements with Australia and New Zealand, and we are close to joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) which offers huge potential for UK exporters in fast growing markets.

    The EU’s trade deals are negotiated down to the lowest common denominator amongst 27 members and are typically shallow. As an independent country we can do much better. We’ve already enhanced two of the larger continuity agreements with Switzerland and Singapore…

    UK-Singapore Digital Economy Agreement (UKSDEA):
    https://www.mti.gov.sg/Improving-Trade/Digital-Economy-Agreements/UKSDEA

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