Soaring inflation: Cut VAT to help families and keep prices down, say Liberal Democrats

The Liberal Democrats have called on the Government to cut VAT, to help families with the cost of living while keeping soaring inflation in check.

It comes as the Chancellor Rishi Sunak rejected calls to cut taxes now as he claimed it could risk fuelling inflation.

When the last emergency VAT cut was introduced in December 2008, inflation fell from 4.1% to 3.1%. The ONS also found that the cut to VAT in the hospitality sector in 2020 led to a fall in consumer inflation.

The Office of Budgetary Responsibility (OBR) has forecast that Rishi Sunak is due to rake in an extra £8.6 billion in extra VAT due to inflation over the next year, or £430 per family.

Liberal Democrats Treasury Spokesperson Christine Jardine said: "Rishi Sunak's excuses for failing to reduce taxes during a cost of living emergency simply don't wash.

"Slashing VAT is one simple tax cut the Conservatives could introduce now to help families while keeping inflation under control. Instead ministers are sitting on their hands and cashing in billions in additional VAT tax receipts while people struggle to pay their bills.

"We have seen in the past how an emergency VAT cut can bring inflation down while encouraging spending in our shops. This move would put money into people's pockets and reduce prices at the shops and at the petrol pump. It should be a no-brainer.

"The Chancellor doesn't need to wait for the next Budget, he could bring in this tax cut at a stroke of a pen now."

When the last emergency VAT cut of 2.5 per cent was introduced on December 1st 2008, inflation fell from 4.1% in November 2008 to 3.1% in December. [ONS, CPI annual rate statistics].

Inflation then remained significantly lower for the duration of the VAT cut .[ONS, CPI annual rate statistics] Average inflation in the years prior and following the VAT cut was:

Jan 2008 - Nov 2008 (pre-cut): 3.7%

December 2008 - December 2009 (VAT cut): 2.3%

Jan 2010 - Dec 2010 (post-cut): 3.3%

Jan 2011 - Dec 2011 (post-cut): 4.5%

The ONS has found that the 5 per cent reduction in the rate of VAT for the hospitality sector led to price reductions for consumers meaning the CPI 1-month inflation index would have reduced, and that "it is also likely that the 12-month inflation would have also reduced". [ONS: October 2020].

Cutting VAT would help the retail industry, giving a much-needed boost to local high streets and increasing economic growth. A similar VAT cut in 2008 was found to boost retail sales by about 1%, increasing total spending by around 0.4%. [IFS, 2014]

When VAT was cut temporarily in 2008, four-fifths of businesses passed on the savings to customers. [HMRC, 2010] Other analyses suggest that 75-80% of the total cut was passed on to consumers.

The additional VAT receipts being cashed in by the Treasury are based on the latest forecasts from Office for Budget Responsibility, compared to its previous forecast published last year. VAT receipts forecasts are taken from the OBR's Economic and fiscal outlooks: March 2021 (Table 3.4 on page 103) and March 2022 (Table 3.4 on page 95). The difference between the March 2021 and March 2022 forecasts amounts to an additional VAT windfall of £8.6 billion for the Treasury in 2022-23, or £248 per family.