Former chancellor Alistair Darling calls for emergency VAT cut

The former chancellor Alistair Darling has urged the government to consider an emergency cut in VAT amid growing speculation that the Treasury will make a tax cut on consumer spending the centre of a plan to boost Britain’s post-Covid-19 recovery.

Rishi Sunak will announce a package of measures in early July intended to help those sectors of the economy, such as retailing, recover from the impact of a three-month lockdown.

Options being considered by the chancellor include a repeat of Darling’s decision in November 2008 to reduce the standard rate of VAT, which then stood at 17.5% and is now 20%.

Darling, who was responsible for the economy during the global financial crisis of 2008, said in the foreword to a report from the centre-right thinktank Policy Exchange that a tax cut to stimulate consumer spending made sense.

“After the Covid-19 crisis subsides, we will enter a new period of recovery. Increasing taxes will not be the answer here, even as the budget deficit and government debt rises. If anything, emergency tax cuts – slashing VAT to 15% for instance, as I did in November 2008 – should be considered to boost consumer spending.”

A five-point cut in the standard rate of VAT would cost £35bn in lost revenue, and Sunak’s immediate predecessor, Sajid Javid, said the Treasury should be thinking about a three-point cut to 17%, which would cost £21bn.

Official figures released last week showed a 12% increase in retail sales from the trough hit during April but Sunak is anxious to support spending as the Treasury’s furloughing scheme is tapered.

Other ideas being considered include cutting employers’ national insurance contributions to encourage businesses to hold on to workers as the wage subsidies come to an end.

Plans for a summer package of measures have been under discussion for weeks but the government has been waiting to see if lockdown restrictions would be further eased before going ahead.

With an announcement imminent that social distancing will be reduced from 2 metres to one, Sunak will outline his plan in early July. The Treasury said the statement would not amount to a mini-budget or include fresh economic forecasts, but would contain some eye-catching measures.

The Policy Exchange report, co-authored by Gerard Lyons, Boris Johnson’s chief economic adviser when he was mayor of London, said higher public spending on infrastructure projects was needed to secure economic recovery and deliver on the government’s “levelling up” pledge.

Amid evidence that seats in older industrial towns – many won for the first time by the Conservatives in the last general election – have been hardest hit by Covid-19, Policy Exchange said there should be no repeat of the cuts in capital spending imposed by David Cameron’s coalition government in 2010.

Lyons, a senior Policy Exchange fellow, said: “The economy is experiencing a paradigm shift and increased capital spending is the way forward.”

Policy Exchange’s paper says after Covid-19, the government should prioritise:

• Electric vehicle-charging infrastructure investment, a rare example of a “shovel-ready” project.

• Gigabit-capable broadband, due to probable changing patterns of working in future.

• Investment in energy R&D, notably hydrogen, to help the UK decarbonise.

• Health-related infrastructure such as green walking and cycling routes.

• Transport upgrades, including support for local authorities, national parks and landowners such as the National Trust to encourage walking and cycling.

• Improving (and where possible adding to) public parks, sport, leisure and swimming facilities.

The report said infrastructure projects costing less than £500m should be devolved to metro and local authorities. The priority should be smaller projects that were shovel-ready, it added.