George Osborne should reverse VAT hike to boost growth, says lobby

Federation of Small Businesses calls for sector-specific VAT reductions to 5% after survey shows dramatic quarterly decline George Osborne must reverse his VAT hike to restore confidence and boost growth, according to a leading business lobby group. The rise to 20% in January is battering hard-hit industries that have yet to recover from the recession, the Federation of Small Businesses said after its quarterly survey showed a dramatic decline in business confidence in the three months to the end of June. The federation’s chairman, John Walker, called on the government to follow the lead of several other EU countries and cut VAT in the construction and tourism sectors to 5% for a year “to help give the economy a real boost”. The VAT rise in January from 17.5% to 20% is a key element of the chancellor’s deficit-reduction plan and was widely supported by many business leaders. The tax is expected to raise about £12bn for the government. But the move has come under fire from Labour, City economists and increasing numbers of businesses following a sharp slowdown in economic activity after a strong recovery last year. Walker said: “Consumer demand is a large barrier to economic growth so a VAT cut would encourage people to spend in these areas.” The federation’s Voice of Small Business index fell by 6.4 points in the first quarter from +6.7 to +0.3. Walker said it was striking that confidence in 13 out of 18 sectors covered by the index showed business confidence below zero. Five sectors fell from a positive to a negative reading. A figure below zero shows that survey respondents believe business activity is contracting rather than expanding. Previously booming industries were among the biggest fallers, with car retailers and repair shops the least confident after a 65-point drop on the previous quarter to an index score of -45. Confidence among hotels, restaurants and bars slipped nine points from +13 to +4 in the first quarter. Large numbers of firms reported lower revenues in the second quarter. A record number said they feared the third quarter would see a further drop in revenues. Walker said: “The economy is still in a fragile state and these figures clearly show that the government’s growth strategy is just not working. In an economy characterised by high unemployment and muted demand, more needs to be done to encourage businesses to take on staff and grow their business so that the recovery can really get back on track. “Since the start of 2010, the FSB Index has proved to be a good barometer of the path that economic growth will take, so the news that it has fallen back to almost zero paints a very worrying picture for GDP.” Labour cut VAT to 15% in response to a 6% contraction in GDP following the banking crash. The decision to raise the rate to 20% effectively increased the level of tax on consumers by £24bn between 2009 to 2011. Britain has yet to recover lost production from 2009. The National Institute of Social & Economic Research said last week that the economy was unlikely to surpass its 2008 level of output until 2013, making it the longest period of depression for more than 80 years. The shadow minister for small business and enterprise, Chuka Umunna, said he was concerned at the steep falls in confidence outside the east and East Midlands, which were the only regions to enjoy a slight boost. “Confidence has dropped particularly badly in certain regions, tumbling from 2 to minus 30 in north-east England. Revenue expectations have also fallen, and small businesses are continuing to have to reduce the size of their workforce. Umunna added: “The government’s policies are holding back economic growth, hampering businesses and putting jobs at risk. A temporary cut in VAT would put money in consumers’ pockets now, which would boost jobs and growth and so help get the deficit down for the long term.” Economic growth (GDP) George Osborne Tax and spending Construction industry Travel & leisure Recession Economic policy Conservatives Labour Phillip Inman guardian.co.uk

Posted by on July 18, 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.