Labour demands VAT rethink to remedy ‘flatlining’ economy

Ed Balls issues warning that UK recovery has stalled as gloomy retail figures are released Ed Balls, the shadow chancellor, has called for an emergency temporary cut in VAT to “jump-start” Britain’s “flatlining” economy that is performing at a slower rate than its major competitors. As new figures showed retail sales fell by twice the expected rate in May, by 1.4%, Balls accused the chancellor, George Osborne, of endangering the economy by embarking on a “rash and headlong lunge” at rapid deficit reduction. The shadow chancellor said there was still time to slow the pace of deficit reduction by reversing, on a temporary basis, the 2.5% increase in VAT introduced in January by Osborne. Increasing VAT from 17.5% to 20% was one of the main early measures of the chancellor’s plan to eliminate the structural deficit by 2015. In a speech at the London School of Economics, Balls called for a rethink. He said: “My suggestion to George Osborne is that, while he will not agree to reverse his mistaken VAT rise permanently, he should now reverse it temporarily until the economy is growing strongly again … Slowing down the pace of deficit reduction with a temporary VAT cut now would give the flatlining economy the jump-start it so urgently needs, boost jobs and be a better way to get the deficit down for the long term.” The intervention by Balls, which came as the gloomy retail figures were released, was quickly rejected by the government, which said that reversing the VAT increase would cost £12bn a year. At a question and answer session in Lincoln, David Cameron responded to those calling for tax cuts and more government spending and investment. “All you would be doing, if you did that, is making the problem of your deficit, of your overdraft, worse,” he said. Balls, in his first setpiece lecture since his appointment as shadow chancellor in January, was seeking to reframe the debate on deficit reduction. He accused Osborne of refusing to countenance an alternative so he could: • Blame Labour for failing to face up to tough decisions if the coalition plan worked. Balls said the plan to eradicate the structural deficit in this parliament “was primarily about electoral politics – rapid tax rises and spending cuts chiefly designed to fit a political timetable that gets the pain over early [and] makes Labour take the blame”. • Claim Labour would not have made any difference if the plan failed. Balls signed up to Alistair Darling’s plans to halve the deficit over four years when he was appointed shadow chancellor in January. The Treasury said the Darling plan would have led a re-elected Labour government to deliver about 85% of the cuts introduced by the coalition. Labour, according to the Treasury, would have cut £7 in every £8 proposed by the coalition, leading to £14bn in cuts this year compared with £16bn by the coalition. Balls remains committed to the Darling plan, although he believes it will become increasingly irrelevant. For the moment, he is challenging the chancellor to adopt the VAT cut as a middle course between the Darling and coalition plans to provide a stimulus. Balls said a failure to acknowledge that the recovery had stalled, after a reasonable performance in the first half of 2010, risked inflicting permanent damage on the economy. He said the “scale of the fiscal hit to demand and growth in Britain this year is unprecedented”, adding that, a year ago, the Office for Budget Responsibility “forecast growth of 2.6% in 2011 – they now predict just 1.7%”. He said: “Months – or years – of slow growth aren’t something that will be quickly repaired. It risks leaving a permanent dent in our nation’s prosperity – relative to how prosperous we might have been and how prosperous we are relative to other countries. Because economic history also teaches us that economies don’t simply bounce back to where they would have been.” Balls offered no apology for Labour’s spending either ahead of or during the banking crisis to prevent recession tipping into depression. He admitted he was still relatively isolated in his view that the markets would tolerate a less aggressive approach to the deficit and said it was too early to say whether his judgment, or that of Osborne, would be proved right. The shadow chancellor said the economic evidence so far was pointing in his direction, arguing: “Looking at growth across the EU over the last six months compared to the previous six months, we have gone from the top end of the economic growth league table to fourth from bottom, with only Denmark, Greece and Portugal below us. “Unemployment forecasts for the next four years have all been revised upwards. Inflation forecasts for the end of 2011 have risen sharply from 1.6% to 4.2% with a further increase next year, and the result of this slower growth, higher unemployment and higher inflation is that the government will have to borrow a further £46bn more than forecast after the spending review.” Balls expressed astonishment that Osborne had not thought more carefully about the “fork in the road” when he came to office last May: “He did not hesitate in making a rash and headlong lunge down the path of rapid deficit reduction.” The shadow chancellor was scathing about Osborne’s claims last year, as he hardened his deficit reduction plans, that Britain was facing a Greek-style sovereign debt crisis. Balls said: “That must have been the first time in history that a British chancellor has looked not to America, France or Germany, but to Greece, Portugal or Ireland for economic insights … We have the longest-term bonds of any country, which means we need to raise much less each year and are not so subject to short-term moods in the markets.” Nick Clegg, who campaigned during the general election against the “bombshell” of raising VAT, dismissed the speech. The deputy prime minister said: “The Labour party is now perilously close to terminally and permanently losing the confidence of the British people on the economy. “There appeared still to be no recognition whatsoever of the responsibilities of government when Labour was in power for 13 years, no recognition of the extent of the economic rebalancing exercise needed to get the country back on a sustainable footing, endless reference to a Plan B which to me means ‘bankrupt’ – intellectually bankrupt, fiscally bankrupt and politically bankrupt.” Treasury sources said: “This speech marks a step back for Labour and for Ed Balls. Rather than owning up to mistakes in the past and showing that he understood what went wrong, he said he is sticking to his strategy. “If he had delivered the speech David Miliband was intending to deliver as Labour leader, and acknowledge the scale of the deficit under Labour, then that would have shown the party is getting its act together.” Economic policy Economics Ed Balls George Osborne Nicholas Watt Patrick Wintour guardian.co.uk

Posted by on June 16, 2011. Filed under News, Politics, World News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.